California
 
94-2404110
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Apple Park Way
Cupertino, California
 
95014
(Address of principal executive offices)
 
(Zip Code)
 
Common Stock, $0.00001 par value per share
1.000% Notes due 2022
1.375% Notes due 2024
0.875% Notes due 2025
1.625% Notes due 2026
2.000% Notes due 2027
1.375% Notes due 2029
3.050% Notes due 2029
3.600% Notes due 2042
 
The Nasdaq Stock Market LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
New York Stock Exchange LLC
(Title of each class)
 
(Name of each exchange on which registered)
 
Large accelerated filer
 
☒
 
Accelerated filer
 
☐
Non-accelerated filer
 
☐
 
Smaller reporting company
 
☐
 
 
 
 
Emerging growth company
 
☐
 
 
Page
Part I
Item 1.
Business
1
Item 1A.
Risk Factors
8
Item 1B.
Unresolved Staff Comments
17
Item 2.
Properties
18
Item 3.
Legal Proceedings
18
Item 4.
Mine Safety Disclosures
18
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
19
Item 6.
Selected Financial Data
21
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
35
Item 8.
Financial Statements and Supplementary Data
37
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
67
Item 9A.
Controls and Procedures
67
Item 9B.
Other Information
67
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
68
Item 11.
Executive Compensation
68
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
68
Item 13.
Certain Relationships and Related Transactions, and Director Independence
68
Item 14.
Principal Accounting Fees and Services
68
Part IV
Item 15.
Exhibits, Financial Statement Schedules
69
Item 16.
Form 10-K Summary
71
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Periods
 
Total Number
of Shares Purchased
 
Average
Price
Paid Per Share
 
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
 
Approximate Dollar Value of
Shares That May Yet Be Purchased
Under the Plans or Programs (1)
July 1, 2018 to August 4, 2018:
 
 
 
 
 
 
 
 
Open market and privately negotiated purchases
 
26,859

 
$
192.50

 
26,859

 
 
 
 
 
 
 
 
 
 
 
August 5, 2018 to September 1, 2018:
 
 
 
 
 
 
 
 
Open market and privately negotiated purchases
 
36,575

 
$
214.07

 
36,575

 
 
 
 
 
 
 
 
 
 
 
September 2, 2018 to September 29, 2018:
 
 
 
 
 
 
 
 
Open market and privately negotiated purchases
 
29,029

 
$
222.07

 
29,029

 
 
Total
 
92,463

 
 
 
 
 
$
70,970

(1)
On May 1, 2018, the Company announced the Board of Directors had authorized a program to repurchase up to $100 billion of the Company’s common stock, of which $29.0 billion had been utilized as of September 29, 2018. The remaining $71.0 billion in the table represents the amount available to repurchase shares under the authorized repurchase program as of September 29, 2018. The Company’s share repurchase program does not obligate it to acquire any specific number of shares. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
*
$100 invested on September 27, 2013 in stock or index, including reinvestment of dividends. Data points are the last day of each fiscal year for the Company’s common stock and September 30th for indexes.
 
 
September
2013
 
September
2014
 
September
2015
 
September
2016
 
September
2017
 
September
2018
Apple Inc.
 
$
100

 
$
149

 
$
173

 
$
174

 
$
242

 
$
359

S&P 500 Index
 
$
100

 
$
120

 
$
119

 
$
137

 
$
163

 
$
192

S&P Information Technology Index
 
$
100

 
$
129

 
$
132

 
$
162

 
$
209

 
$
275

Dow Jones U.S. Technology Supersector Index
 
$
100

 
$
130

 
$
130

 
$
159

 
$
203

 
$
266

Item 6.
Selected Financial Data
 
2018
 
2017
 
2016
 
2015
 
2014
Net sales
$
265,595

 
$
229,234

 
$
215,639

 
$
233,715

 
$
182,795

Net income
$
59,531

 
$
48,351

 
$
45,687

 
$
53,394

 
$
39,510

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
12.01

 
$
9.27

 
$
8.35

 
$
9.28

 
$
6.49

Diluted
$
11.91

 
$
9.21

 
$
8.31

 
$
9.22

 
$
6.45

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per share
$
2.72

 
$
2.40

 
$
2.18

 
$
1.98

 
$
1.82

 
 
 
 
 
 
 
 
 
 
Shares used in computing earnings per share:
 
 
 
 
 
 
 
 
 
Basic
4,955,377

 
5,217,242

 
5,470,820

 
5,753,421

 
6,085,572

Diluted
5,000,109

 
5,251,692

 
5,500,281

 
5,793,069

 
6,122,663

 
 
 
 
 
 
 
 
 
 
Total cash, cash equivalents and marketable securities
$
237,100

 
$
268,895

 
$
237,585

 
$
205,666

 
$
155,239

Total assets
$
365,725

 
$
375,319

 
$
321,686

 
$
290,345

 
$
231,839

Non-current portion of term debt
$
93,735

 
$
97,207

 
$
75,427

 
$
53,329

 
$
28,987

Other non-current liabilities
$
45,180

 
$
40,415

 
$
36,074

 
$
33,427

 
$
24,826

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
2018
 
Change
 
2017
 
Change
 
2016
Net Sales by Reportable Segment:
 
 
 
 
 
 
 
 
 
Americas
$
112,093

 
16
 %
 
$
96,600

 
12
 %
 
$
86,613

Europe
62,420

 
14
 %
 
54,938

 
10
 %
 
49,952

Greater China
51,942

 
16
 %
 
44,764

 
(8
)%
 
48,492

Japan
21,733

 
23
 %
 
17,733

 
5
 %
 
16,928

Rest of Asia Pacific
17,407

 
15
 %
 
15,199

 
11
 %
 
13,654

Total net sales
$
265,595

 
16
 %
 
$
229,234

 
6
 %
 
$
215,639

 
 
 
 
 
 
 
 
 
 
Net Sales by Product:
 
 
 
 
 
 
 
 
 
iPhone (1)
$
166,699

 
18
 %
 
$
141,319

 
3
 %
 
$
136,700

iPad (1)
18,805

 
(2
)%
 
19,222

 
(7
)%
 
20,628

Mac (1)
25,484

 
(1
)%
 
25,850

 
13
 %
 
22,831

Services (2)
37,190

 
24
 %
 
29,980

 
23
 %
 
24,348

Other Products (1)(3)
17,417

 
35
 %
 
12,863

 
16
 %
 
11,132

Total net sales
$
265,595

 
16
 %
 
$
229,234

 
6
 %
 
$
215,639

 
 
 
 
 
 
 
 
 
 
Unit Sales by Product:
 
 
 
 
 
 
 
 
 
iPhone
217,722

 
—
 %
 
216,756

 
2
 %
 
211,884

iPad
43,535

 
—
 %
 
43,753

 
(4
)%
 
45,590

Mac
18,209

 
(5
)%
 
19,251

 
4
 %
 
18,484

(1)
Includes deferrals and amortization of related software upgrade rights and non-software services.
(2)
Includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services. Services net sales in 2018 included a favorable one-time item of $236 million in connection with the final resolution of various lawsuits. Services net sales in 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.
(3)
Includes sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and other Apple-branded and third-party accessories.
 
2018
 
Change
 
2017
 
Change
 
2016
Net sales
$
166,699

 
18
%
 
$
141,319

 
3
%
 
$
136,700

Percentage of total net sales
63
%
 


 
62
%
 
 
 
63
%
Unit sales
217,722

 
—
%
 
216,756

 
2
%
 
211,884

 
2018
 
Change
 
2017
 
Change
 
2016
Net sales
$
18,805

 
(2
)%
 
$
19,222

 
(7
)%
 
$
20,628

Percentage of total net sales
7
%
 
 
 
8
%
 
 
 
10
%
Unit sales
43,535

 
—
 %
 
43,753

 
(4
)%
 
45,590

 
2018
 
Change
 
2017
 
Change
 
2016
Net sales
$
25,484

 
(1
)%
 
$
25,850

 
13
%
 
$
22,831

Percentage of total net sales
10
%
 
 
 
11
%
 
 
 
11
%
Unit sales
18,209

 
(5
)%
 
19,251

 
4
%
 
18,484

 
2018
 
Change
 
2017
 
Change
 
2016
Net sales
$
37,190

 
24
%
 
$
29,980

 
23
%
 
$
24,348

Percentage of total net sales
14
%
 
 
 
13
%
 
 
 
11
%
 
2018
 
Change
 
2017
 
Change
 
2016
Net sales
$
112,093

 
16
%
 
$
96,600

 
12
%
 
$
86,613

Percentage of total net sales
42
%
 
 
 
42
%
 
 
 
40
%
 
2018
 
Change
 
2017
 
Change
 
2016
Net sales
$
62,420

 
14
%
 
$
54,938

 
10
%
 
$
49,952

Percentage of total net sales
24
%
 
 
 
24
%
 
 
 
23
%
 
2018
 
Change
 
2017
 
Change
 
2016
Net sales
$
51,942

 
16
%
 
$
44,764

 
(8
)%
 
$
48,492

Percentage of total net sales
20
%
 
 
 
20
%
 
 
 
22
%
 
2018
 
Change
 
2017
 
Change
 
2016
Net sales
$
21,733

 
23
%
 
$
17,733

 
5
%
 
$
16,928

Percentage of total net sales
8
%
 
 
 
8
%
 
 
 
8
%
 
2018
 
Change
 
2017
 
Change
 
2016
Net sales
$
17,407

 
15
%
 
$
15,199

 
11
%
 
$
13,654

Percentage of total net sales
7
%
 
 
 
7
%
 
 
 
6
%
 
2018
 
2017
 
2016
Net sales
$
265,595

 
$
229,234

 
$
215,639

Cost of sales
163,756

 
141,048

 
131,376

Gross margin
$
101,839

 
$
88,186

 
$
84,263

Gross margin percentage
38.3
%
 
38.5
%
 
39.1
%
 
2018
 
Change
 
2017
 
Change
 
2016
Research and development
$
14,236

 
23
%
 
$
11,581

 
15
%
 
$
10,045

Percentage of total net sales
5
%
 
 
 
5
%
 
 
 
5
%
Selling, general and administrative
$
16,705

 
9
%
 
$
15,261

 
8
%
 
$
14,194

Percentage of total net sales
6
%
 
 
 
7
%
 
 
 
7
%
Total operating expenses
$
30,941

 
15
%
 
$
26,842

 
11
%
 
$
24,239

Percentage of total net sales
12
%
 
 
 
12
%
 
 
 
11
%
 
2018
 
Change
 
2017
 
Change
 
2016
Interest and dividend income
$
5,686

 
 
 
$
5,201

 
 
 
$
3,999

Interest expense
(3,240
)
 
 
 
(2,323
)
 
 
 
(1,456
)
Other expense, net
(441
)
 
 
 
(133
)
 
 
 
(1,195
)
Total other income/(expense), net
$
2,005

 
(27
)%
 
$
2,745

 
104
%
 
$
1,348

 
2018
 
2017
 
2016
Provision for income taxes
$
13,372

 
$
15,738

 
$
15,685

Effective tax rate
18.3
%
 
24.6
%
 
25.6
%
 
2018
 
2017
 
2016
Cash, cash equivalents and marketable securities (1)
$
237,100

 
$
268,895

 
$
237,585

Property, plant and equipment, net
$
41,304

 
$
33,783

 
$
27,010

Commercial paper
$
11,964

 
$
11,977

 
$
8,105

Total term debt
$
102,519

 
$
103,703

 
$
78,927

Working capital
$
14,473

 
$
27,831

 
$
27,863

Cash generated by operating activities (2)
$
77,434

 
$
64,225

 
$
66,231

Cash generated by/(used in) investing activities
$
16,066

 
$
(46,446
)
 
$
(45,977
)
Cash used in financing activities (2)
$
(87,876
)
 
$
(17,974
)
 
$
(20,890
)
(1)
As of September 29, 2018, total cash, cash equivalents and marketable securities included $20.3 billion that was restricted from general use, related to the State Aid Decision and other agreements.
(2)
Refer to Note 1, “Summary of Significant Accounting Polices” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for more information on the prior period reclassification related to the Company’s adoption of ASU 2016-09.
 
Payments Due
in 2019
 
Payments Due
in 2020–2021
 
Payments Due
in 2022–2023
 
Payments Due
After 2023
 
Total
Term debt
$
8,797

 
$
18,933

 
$
17,978

 
$
58,485

 
$
104,193

Operating leases
1,298

 
2,507

 
1,838

 
3,984

 
9,627

Manufacturing purchase obligations (1)
41,548

 
2,469

 
1,183

 
—

 
45,200

Other purchase obligations
3,784

 
2,482

 
681

 
66

 
7,013

Deemed repatriation tax payable
—

 
5,366

 
5,942

 
22,281

 
33,589

Total
$
55,427

 
$
31,757

 
$
27,622

 
$
84,816

 
$
199,622

(1)
Represents amount expected to be paid under manufacturing-related supplier arrangements, substantially all of which is noncancelable.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
 
Page
Consolidated Statements of Operations for the years ended September 29, 2018, September 30, 2017 and September 24, 2016
 
38
Consolidated Statements of Comprehensive Income for the years ended September 29, 2018, September 30, 2017 and September 24, 2016
 
39
Consolidated Balance Sheets as of September 29, 2018 and September 30, 2017
 
40
Consolidated Statements of Shareholders’ Equity for the years ended September 29, 2018, September 30, 2017 and September 24, 2016
 
41
Consolidated Statements of Cash Flows for the years ended September 29, 2018, September 30, 2017 and September 24, 2016
 
42
Notes to Consolidated Financial Statements
 
43
Selected Quarterly Financial Information (Unaudited)
 
64
Reports of Independent Registered Public Accounting Firm
 
65
 
Years ended
 
September 29,
2018
 
September 30,
2017
 
September 24,
2016
Net sales
$
265,595

 
$
229,234

 
$
215,639

Cost of sales
163,756

 
141,048

 
131,376

Gross margin
101,839


88,186


84,263

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Research and development
14,236

 
11,581

 
10,045

Selling, general and administrative
16,705

 
15,261

 
14,194

Total operating expenses
30,941


26,842


24,239

 
 
 
 
 
 
Operating income
70,898

 
61,344

 
60,024

Other income/(expense), net
2,005

 
2,745

 
1,348

Income before provision for income taxes
72,903


64,089


61,372

Provision for income taxes
13,372

 
15,738

 
15,685

Net income
$
59,531


$
48,351


$
45,687

 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
Basic
$
12.01

 
$
9.27

 
$
8.35

Diluted
$
11.91

 
$
9.21

 
$
8.31

 
 
 
 
 
 
Shares used in computing earnings per share:
 
 
 
 
 
Basic
4,955,377

 
5,217,242

 
5,470,820

Diluted
5,000,109

 
5,251,692

 
5,500,281

 
Years ended
 
September 29,
2018
 
September 30,
2017
 
September 24,
2016
Net income
$
59,531

 
$
48,351

 
$
45,687

Other comprehensive income/(loss):
 
 
 
 
 
Change in foreign currency translation, net of tax effects of $(1), $(77) and $8, respectively
(525
)
 
224

 
75

 
 
 
 
 
 
Change in unrealized gains/losses on derivative instruments:
 
 
 
 
 
Change in fair value of derivatives, net of tax benefit/(expense) of $(149), $(478) and $(7), respectively
523

 
1,315

 
7

Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $(104), $475 and $131, respectively
382

 
(1,477
)
 
(741
)
Total change in unrealized gains/losses on derivative instruments, net of tax
905


(162
)

(734
)
 
 
 
 
 
 
Change in unrealized gains/losses on marketable securities:
 
 
 
 
 
Change in fair value of marketable securities, net of tax benefit/(expense) of $1,156, $425 and $(863), respectively
(3,407
)
 
(782
)
 
1,582

Adjustment for net (gains)/losses realized and included in net income, net of tax expense/(benefit) of $21, $35 and $(31), respectively
1

 
(64
)
 
56

Total change in unrealized gains/losses on marketable securities, net of tax
(3,406
)

(846
)

1,638

 
 
 
 
 
 
Total other comprehensive income/(loss)
(3,026
)

(784
)

979

Total comprehensive income
$
56,505


$
47,567


$
46,666

 
September 29,
2018
 
September 30,
2017
ASSETS:
Current assets:
 
 
 
Cash and cash equivalents
$
25,913

 
$
20,289

Marketable securities
40,388

 
53,892

Accounts receivable, net
23,186

 
17,874

Inventories
3,956

 
4,855

Vendor non-trade receivables
25,809

 
17,799

Other current assets
12,087

 
13,936

Total current assets
131,339

 
128,645

 
 
 
 
Non-current assets:
 
 
 
Marketable securities
170,799

 
194,714

Property, plant and equipment, net
41,304

 
33,783

Other non-current assets
22,283

 
18,177

Total non-current assets
234,386

 
246,674

Total assets
$
365,725

 
$
375,319

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
 
 
 
Accounts payable
$
55,888

 
$
44,242

Other current liabilities
32,687

 
30,551

Deferred revenue
7,543

 
7,548

Commercial paper
11,964

 
11,977

Term debt
8,784

 
6,496

Total current liabilities
116,866

 
100,814

 
 
 
 
Non-current liabilities:
 
 
 
Deferred revenue
2,797

 
2,836

Term debt
93,735

 
97,207

Other non-current liabilities
45,180

 
40,415

Total non-current liabilities
141,712

 
140,458

Total liabilities
258,578

 
241,272

 
 
 
 
Commitments and contingencies

 

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock and additional paid-in capital, $0.00001 par value: 12,600,000 shares authorized; 4,754,986 and 5,126,201 shares issued and outstanding, respectively
40,201

 
35,867

Retained earnings
70,400

 
98,330

Accumulated other comprehensive income/(loss)
(3,454
)
 
(150
)
Total shareholders’ equity
107,147

 
134,047

Total liabilities and shareholders’ equity
$
365,725


$
375,319

 
Common Stock and
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive Income/(Loss)
 
Total Shareholders’ Equity
 
Shares
 
Amount
 
Balances as of September 26, 2015
5,578,753

 
$
27,416

 
$
92,284

 
$
(345
)
 
$
119,355

Net income
—

 
—

 
45,687

 
—

 
45,687

Other comprehensive income/(loss)
—

 
—

 
—

 
979

 
979

Dividends and dividend equivalents declared at $2.18 per share or RSU
—

 
—

 
(12,188
)
 
—

 
(12,188
)
Repurchase of common stock
(279,609
)
 
—

 
(29,000
)
 
—

 
(29,000
)
Share-based compensation
—

 
4,262

 
—

 
—

 
4,262

Common stock issued, net of shares withheld for employee taxes
37,022

 
(806
)
 
(419
)
 
—

 
(1,225
)
Tax benefit from equity awards, including transfer pricing adjustments
—

 
379

 
—

 
—

 
379

Balances as of September 24, 2016
5,336,166

 
31,251

 
96,364

 
634

 
128,249

Net income
—

 
—

 
48,351

 
—

 
48,351

Other comprehensive income/(loss)
—

 
—

 
—

 
(784
)
 
(784
)
Dividends and dividend equivalents declared at $2.40 per share or RSU
—

 
—

 
(12,803
)
 
—

 
(12,803
)
Repurchase of common stock
(246,496
)
 
—

 
(33,001
)
 
—

 
(33,001
)
Share-based compensation
—

 
4,909

 
—

 
—

 
4,909

Common stock issued, net of shares withheld for employee taxes
36,531

 
(913
)
 
(581
)
 
—

 
(1,494
)
Tax benefit from equity awards, including transfer pricing adjustments
—

 
620

 
—

 
—

 
620

Balances as of September 30, 2017
5,126,201

 
35,867

 
98,330

 
(150
)
 
134,047

Cumulative effect of change in accounting principle
—

 
—

 
278

 
(278
)
 
—

Net income
—

 
—

 
59,531

 
—

 
59,531

Other comprehensive income/(loss)
—

 
—

 
—

 
(3,026
)
 
(3,026
)
Dividends and dividend equivalents declared at $2.72 per share or RSU
—

 
—

 
(13,735
)
 
—

 
(13,735
)
Repurchase of common stock
(405,549
)
 
—

 
(73,056
)
 
—

 
(73,056
)
Share-based compensation
—

 
5,443

 
—

 
—

 
5,443

Common stock issued, net of shares withheld for employee taxes
34,334

 
(1,109
)
 
(948
)
 
—

 
(2,057
)
Balances as of September 29, 2018
4,754,986

 
$
40,201

 
$
70,400

 
$
(3,454
)
 
$
107,147

 
Years ended
 
September 29,
2018
 
September 30,
2017
 
September 24,
2016
Cash and cash equivalents, beginning of the year
$
20,289

 
$
20,484

 
$
21,120

Operating activities:
 
 
 
 
 
Net income
59,531

 
48,351

 
45,687

Adjustments to reconcile net income to cash generated by operating activities:
 
 
 
 
 
Depreciation and amortization
10,903

 
10,157

 
10,505

Share-based compensation expense
5,340

 
4,840

 
4,210

Deferred income tax expense/(benefit)
(32,590
)
 
5,966

 
4,938

Other
(444
)
 
(166
)
 
486

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable, net
(5,322
)
 
(2,093
)
 
527

Inventories
828

 
(2,723
)
 
217

Vendor non-trade receivables
(8,010
)
 
(4,254
)
 
(51
)
Other current and non-current assets
(423
)
 
(5,318
)
 
1,055

Accounts payable
9,175

 
8,966

 
2,117

Deferred revenue
(44
)
 
(626
)
 
(1,554
)
Other current and non-current liabilities
38,490

 
1,125

 
(1,906
)
Cash generated by operating activities
77,434


64,225


66,231

Investing activities:
 
 
 
 
 
Purchases of marketable securities
(71,356
)
 
(159,486
)
 
(142,428
)
Proceeds from maturities of marketable securities
55,881

 
31,775

 
21,258

Proceeds from sales of marketable securities
47,838

 
94,564

 
90,536

Payments for acquisition of property, plant and equipment
(13,313
)
 
(12,451
)
 
(12,734
)
Payments made in connection with business acquisitions, net
(721
)
 
(329
)
 
(297
)
Purchases of non-marketable securities
(1,871
)
 
(521
)
 
(1,388
)
Proceeds from non-marketable securities
353

 
126

 
—

Other
(745
)
 
(124
)
 
(924
)
Cash generated by/(used in) investing activities
16,066


(46,446
)

(45,977
)
Financing activities:
 
 
 
 
 
Proceeds from issuance of common stock
669

 
555

 
495

Payments for taxes related to net share settlement of equity awards
(2,527
)
 
(1,874
)
 
(1,570
)
Payments for dividends and dividend equivalents
(13,712
)
 
(12,769
)
 
(12,150
)
Repurchases of common stock
(72,738
)
 
(32,900
)
 
(29,722
)
Proceeds from issuance of term debt, net
6,969

 
28,662

 
24,954

Repayments of term debt
(6,500
)
 
(3,500
)
 
(2,500
)
Change in commercial paper, net
(37
)
 
3,852

 
(397
)
Cash used in financing activities
(87,876
)

(17,974
)

(20,890
)
Increase/(Decrease) in cash and cash equivalents
5,624

 
(195
)
 
(636
)
Cash and cash equivalents, end of the year
$
25,913


$
20,289


$
20,484

Supplemental cash flow disclosure:
 
 
 
 
 
Cash paid for income taxes, net
$
10,417

 
$
11,591

 
$
10,444

Cash paid for interest
$
3,022

 
$
2,092

 
$
1,316

 
2018
 
2017
 
2016
Numerator:
 
 
 
 
 
Net income
$
59,531

 
$
48,351

 
$
45,687

 
 
 
 
 
 
Denominator:
 
 
 
 
 
Weighted-average basic shares outstanding
4,955,377

 
5,217,242

 
5,470,820

Effect of dilutive securities
44,732

 
34,450

 
29,461

Weighted-average diluted shares
5,000,109

 
5,251,692


5,500,281

 
 
 
 
 
 
Basic earnings per share
$
12.01

 
$
9.27

 
$
8.35

Diluted earnings per share
$
11.91

 
$
9.21

 
$
8.31

 
2018
 
Adjusted
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-Term
Marketable
Securities
 
Long-Term
Marketable
Securities
Cash
$
11,575

 
$
—

 
$
—

 
$
11,575

 
$
11,575

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1 (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
8,083

 
—

 
—

 
8,083

 
8,083

 
—

 
—

Mutual funds
799

 
—

 
(116
)
 
683

 
—

 
683

 
—

Subtotal
8,882

 
—

 
(116
)
 
8,766

 
8,083

 
683

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2 (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
47,296

 
—

 
(1,202
)
 
46,094

 
1,613

 
7,606

 
36,875

U.S. agency securities
4,127

 
—

 
(48
)
 
4,079

 
1,732

 
360

 
1,987

Non-U.S. government securities
21,601

 
49

 
(250
)
 
21,400

 
—

 
3,355

 
18,045

Certificates of deposit and time deposits
3,074

 
—

 
—

 
3,074

 
1,247

 
1,330

 
497

Commercial paper
2,573

 
—

 
—

 
2,573

 
1,663

 
910

 
—

Corporate securities
123,001

 
152

 
(2,038
)
 
121,115

 
—

 
25,162

 
95,953

Municipal securities
946

 
—

 
(12
)
 
934

 
—

 
178

 
756

Mortgage- and asset-backed securities
18,105

 
8

 
(623
)
 
17,490

 
—

 
804

 
16,686

Subtotal
220,723

 
209

 
(4,173
)
 
216,759

 
6,255

 
39,705

 
170,799

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total (3)
$
241,180

 
$
209

 
$
(4,289
)
 
$
237,100

 
$
25,913

 
$
40,388

 
$
170,799

 
2017
 
Adjusted
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
Cash and
Cash
Equivalents
 
Short-Term
Marketable
Securities
 
Long-Term
Marketable
Securities
Cash
$
7,982

 
$
—

 
$
—

 
$
7,982

 
$
7,982

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1 (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
6,534

 
—

 
—

 
6,534

 
6,534

 
—

 
—

Mutual funds
799

 
—

 
(88
)
 
711

 
—

 
711

 
—

Subtotal
7,333

 
—

 
(88
)
 
7,245

 
6,534

 
711

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2 (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
55,254

 
58

 
(230
)
 
55,082

 
865

 
17,228

 
36,989

U.S. agency securities
5,162

 
2

 
(9
)
 
5,155

 
1,439

 
2,057

 
1,659

Non-U.S. government securities
7,827

 
210

 
(37
)
 
8,000

 
9

 
123

 
7,868

Certificates of deposit and time deposits
5,832

 
—

 
—

 
5,832

 
1,142

 
3,918

 
772

Commercial paper
3,640

 
—

 
—

 
3,640

 
2,146

 
1,494

 
—

Corporate securities
152,724

 
969

 
(242
)
 
153,451

 
172

 
27,591

 
125,688

Municipal securities
961

 
4

 
(1
)
 
964

 
—

 
114

 
850

Mortgage- and asset-backed securities
21,684

 
35

 
(175
)
 
21,544

 
—

 
656

 
20,888

Subtotal
253,084

 
1,278

 
(694
)
 
253,668

 
5,773

 
53,181

 
194,714

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
268,399

 
$
1,278

 
$
(782
)
 
$
268,895

 
$
20,289

 
$
53,892

 
$
194,714

(1)
Level 1 fair value estimates are based on quoted prices in active markets for identical assets or liabilities.
(2)
Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
(3)
As of September 29, 2018, total cash, cash equivalents and marketable securities included $20.3 billion that was restricted from general use, related to the State Aid Decision (refer to Note 4, “Income Taxes”) and other agreements.
 
2018
 
Continuous Unrealized Losses
 
Less than 12 Months
 
12 Months or Greater
 
Total
Fair value of marketable securities
$
126,238

 
$
60,599

 
$
186,837

Unrealized losses
$
(2,400
)
 
$
(1,889
)
 
$
(4,289
)
 
2017
 
Continuous Unrealized Losses
 
Less than 12 Months
 
12 Months or Greater
 
Total
Fair value of marketable securities
$
101,986

 
$
8,290

 
$
110,276

Unrealized losses
$
(596
)
 
$
(186
)
 
$
(782
)
 
2018
 
Fair Value of
Derivatives Designated
as Hedge Instruments
 
Fair Value of
Derivatives Not Designated
as Hedge Instruments
 
Total
Fair Value
Derivative assets (1):
 
 
 
 
 
Foreign exchange contracts
$
1,015

 
$
259

 
$
1,274

 
 
 
 
 
 
Derivative liabilities (2):
 
 
 
 
 
Foreign exchange contracts
$
543

 
$
137

 
$
680

Interest rate contracts
$
1,456

 
$
—

 
$
1,456

 
2017
 
Fair Value of
Derivatives Designated
as Hedge Instruments
 
Fair Value of
Derivatives Not Designated
as Hedge Instruments
 
Total
Fair Value
Derivative assets (1):
 
 
 
 
 
Foreign exchange contracts
$
1,049

 
$
363

 
$
1,412

Interest rate contracts
$
218

 
$
—

 
$
218

 
 
 
 
 
 
Derivative liabilities (2):
 
 
 
 
 
Foreign exchange contracts
$
759

 
$
501

 
$
1,260

Interest rate contracts
$
303

 
$
—

 
$
303

(1)
The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets and other non-current assets in the Consolidated Balance Sheets.
(2)
The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as other current liabilities and other non-current liabilities in the Consolidated Balance Sheets.
 
2018
 
2017
 
2016
Gains/(Losses) recognized in OCI – effective portion:
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
Foreign exchange contracts
$
682

 
$
1,797

 
$
109

Interest rate contracts
1

 
7

 
(57
)
Total
$
683


$
1,804


$
52

 
 
 
 
 
 
Net investment hedges:
 
 
 
 
 
Foreign currency debt
$
4

 
$
67

 
$
(258
)
 
 
 
 
 
 
Gains/(Losses) reclassified from AOCI into net income – effective portion:
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
Foreign exchange contracts
$
(482
)
 
$
1,958

 
$
885

Interest rate contracts
1

 
(2
)
 
(11
)
Total
$
(481
)

$
1,956


$
874

 
 
 
 
 
 
Gains/(Losses) on derivative instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Foreign exchange contracts
$
(168
)
 
$
—

 
$
—

Interest rate contracts
(1,363
)
 
(810
)
 
341

Total
$
(1,531
)
 
$
(810
)
 
$
341

 
 
 
 
 
 
Gains/(Losses) related to hedged items:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Marketable securities
$
167

 
$
—

 
$
—

Fixed-rate debt
1,363

 
810

 
(341
)
Total
$
1,530

 
$
810

 
$
(341
)
 
2018
 
2017
 
Notional
Amount
 
Credit Risk
Amount
 
Notional
Amount
 
Credit Risk
Amount
Instruments designated as accounting hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
65,368

 
$
1,015

 
$
56,156

 
$
1,049

Interest rate contracts
$
33,250

 
$
—

 
$
33,000

 
$
218

 
 
 
 
 
 
 
 
Instruments not designated as accounting hedges:
 
 
 
 
 
 
 
Foreign exchange contracts
$
63,062

 
$
259

 
$
69,774

 
$
363

 
2018
 
2017
Land and buildings
$
16,216

 
$
13,587

Machinery, equipment and internal-use software
65,982

 
54,210

Leasehold improvements
8,205

 
7,279

Gross property, plant and equipment
90,403

 
75,076

Accumulated depreciation and amortization
(49,099
)
 
(41,293
)
Total property, plant and equipment, net
$
41,304

 
$
33,783

 
2018
 
2017
Long-term taxes payable
$
33,589

 
$
257

Deferred tax liabilities
426

 
31,504

Other non-current liabilities
11,165

 
8,654

Total other non-current liabilities
$
45,180

 
$
40,415

 
2018
 
2017
 
2016
Interest and dividend income
$
5,686

 
$
5,201

 
$
3,999

Interest expense
(3,240
)
 
(2,323
)
 
(1,456
)
Other expense, net
(441
)
 
(133
)
 
(1,195
)
Total other income/(expense), net
$
2,005

 
$
2,745

 
$
1,348

 
2018
 
2017
 
2016
Federal:
 
 
 
 
 
Current
$
41,425

 
$
7,842

 
$
7,652

Deferred
(33,819
)
 
5,980

 
5,043

Total
7,606


13,822


12,695

State:
 
 
 
 
 
Current
551

 
259

 
990

Deferred
48

 
2

 
(138
)
Total
599


261


852

Foreign:
 
 
 
 
 
Current
3,986

 
1,671

 
2,105

Deferred
1,181

 
(16
)
 
33

Total
5,167


1,655


2,138

Provision for income taxes
$
13,372


$
15,738


$
15,685

 
2018
 
2017
 
2016
Computed expected tax
$
17,890

 
$
22,431

 
$
21,480

State taxes, net of federal effect
271

 
185

 
553

Impacts of the Act
1,515

 
—

 
—

Earnings of foreign subsidiaries
(5,606
)
 
(6,135
)
 
(5,582
)
Domestic production activities deduction
(195
)
 
(209
)
 
(382
)
Research and development credit, net
(560
)
 
(678
)
 
(371
)
Other
57

 
144

 
(13
)
Provision for income taxes
$
13,372


$
15,738


$
15,685

Effective tax rate
18.3
%
 
24.6
%
 
25.6
%
 
2018
 
2017
Deferred tax assets:
 
 
 
Accrued liabilities and other reserves
$
3,151

 
$
4,019

Basis of capital assets
137

 
1,230

Deferred revenue
1,141

 
1,521

Deferred cost sharing
—

 
667

Share-based compensation
513

 
703

Unrealized losses
871

 
—

Other
797

 
834

Total deferred tax assets
6,610

 
8,974

Deferred tax liabilities:
 
 
 
Earnings of foreign subsidiaries
275

 
36,355

Other
501

 
207

Total deferred tax liabilities
776

 
36,562

Net deferred tax assets/(liabilities)
$
5,834


$
(27,588
)
 
2018
 
2017
 
2016
Beginning balances
$
8,407

 
$
7,724

 
$
6,900

Increases related to tax positions taken during a prior year
2,431

 
333

 
1,121

Decreases related to tax positions taken during a prior year
(2,212
)
 
(952
)
 
(257
)
Increases related to tax positions taken during the current year
1,824

 
1,880

 
1,578

Decreases related to settlements with taxing authorities
(756
)
 
(539
)
 
(1,618
)
Decreases related to expiration of statute of limitations
—

 
(39
)
 
—

Ending balances
$
9,694

 
$
8,407

 
$
7,724

 
2018
 
2017
 
2016
Maturities 90 days or less:
 
 
 
 
 
Proceeds from/(Repayments of) commercial paper, net
$
1,044

 
$
(1,782
)
 
$
(869
)
 
 
 
 
 
 
Maturities greater than 90 days:
 
 
 
 
 
Proceeds from commercial paper
14,555

 
17,932

 
3,632

Repayments of commercial paper
(15,636
)
 
(12,298
)
 
(3,160
)
Proceeds from/(Repayments of) commercial paper, net
(1,081
)

5,634

 
472

 
 
 
 
 
 
Total change in commercial paper, net
$
(37
)

$
3,852

 
$
(397
)
 
Maturities
(calendar year)
 
2018
 
2017
 
Amount
(in millions)
 
Effective
Interest Rate
 
Amount
(in millions)
 
Effective
Interest Rate
2013 debt issuance of $17.0 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
 
 
—
 
$
—

 
 
 
 
—
%
 
$
2,000

 
 
 
 
1.10
%
Fixed-rate 2.400% – 3.850% notes
2023
–
2043
 
8,500

 
 
2.44%
–
3.91
%
 
12,500

 
 
1.08%
–
3.91
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 debt issuance of $12.0 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
 
 
2019
 
1,000

 
 
 
 
2.64
%
 
1,000

 
 
 
 
1.61
%
Fixed-rate 2.100% – 4.450% notes
2019
–
2044
 
8,500

 
 
2.64%
–
4.48
%
 
8,500

 
 
1.61%
–
4.48
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 debt issuances of $27.3 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
2019
–
2020
 
1,507

 
 
1.87%
–
2.64
%
 
1,549

 
 
1.56%
–
1.87
%
Fixed-rate 0.350% – 4.375% notes
2019
–
2045
 
24,410

 
 
0.28%
–
4.51
%
 
24,522

 
 
0.28%
–
4.51
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 debt issuances of $24.9 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
2019
–
2021
 
1,350

 
 
2.48%
–
3.44
%
 
1,350

 
 
1.45%
–
2.44
%
Fixed-rate 1.100% – 4.650% notes
2019
–
2046
 
23,059

 
 
1.13%
–
4.78
%
 
23,645

 
 
1.13%
–
4.78
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017 debt issuances of $28.7 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Floating-rate notes
2019
–
2022
 
3,250

 
 
2.41%
–
2.84
%
 
3,250

 
 
1.38%
–
1.81
%
Fixed-rate 0.875% – 4.300% notes
2019
–
2047
 
25,617

 
 
1.54%
–
4.30
%
 
25,705

 
 
1.51%
–
4.30
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First quarter 2018 debt issuance of $7.0 billion:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate 1.800% notes
 
 
2019
 
1,000

 
 
 
 
1.83
%
 
—

 
 
 
 
—
%
Fixed-rate 2.000% notes
 
 
2020
 
1,000

 
 
 
 
2.03
%
 
—

 
 
 
 
—
%
Fixed-rate 2.400% notes
 
 
2023
 
750

 
 
 
 
2.66
%
 
—

 
 
 
 
—
%
Fixed-rate 2.750% notes
 
 
2025
 
1,500

 
 
 
 
2.77
%
 
—

 
 
 
 
—
%
Fixed-rate 3.000% notes
 
 
2027
 
1,500

 
 
 
 
3.05
%
 
—

 
 
 
 
—
%
Fixed-rate 3.750% notes
 
 
2047
 
1,250

 
 
 
 
3.80
%
 
—

 
 
 
 
—
%
Total term debt
 
 
 
 
104,193

 
 
 
 
 
 
104,021

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized premium/(discount) and issuance costs, net
 
 
 
 
(218
)
 
 
 
 
 
 
(225
)
 
 
 
 
 
Hedge accounting fair value adjustments
 
 
 
 
(1,456
)
 
 
 
 
 
 
(93
)
 
 
 
 
 
Less: Current portion of term debt
 
 
 
 
(8,784
)
 
 
 
 
 
 
(6,496
)
 
 
 
 
 
Total non-current portion of term debt
 
 
 
 
$
93,735

 
 
 
 
 
 
$
97,207

 
 
 
 
 
2019
$
8,797

2020
10,183

2021
8,750

2022
8,583

2023
9,395

Thereafter
58,485

Total term debt
$
104,193

Comprehensive Income Components
 
Financial Statement Line Item
 
2018
 
2017
Unrealized (gains)/losses on derivative instruments:
 
 
 
 
 
 
Foreign exchange contracts
 
Net sales
 
$
214

 
$
(662
)
 
 
Cost of sales
 
(70
)
 
(654
)
 
 
Other income/(expense), net
 
344

 
(638
)
Interest rate contracts
 
Other income/(expense), net
 
(2
)
 
2

 
 
 
 
486

 
(1,952
)
Unrealized (gains)/losses on marketable securities
 
Other income/(expense), net
 
(20
)
 
(99
)
Total amounts reclassified from AOCI
 
 
 
$
466

 
$
(2,051
)
 
Cumulative Foreign
Currency Translation
 
Unrealized Gains/Losses
on Derivative Instruments
 
Unrealized Gains/Losses
on Marketable Securities
 
Total
Balances as of September 24, 2016
$
(578
)
 
$
38

 
$
1,174

 
$
634

Other comprehensive income/(loss) before reclassifications
301

 
1,793

 
(1,207
)
 
887

Amounts reclassified from AOCI
—

 
(1,952
)
 
(99
)
 
(2,051
)
Tax effect
(77
)
 
(3
)
 
460

 
380

Other comprehensive income/(loss)
224


(162
)

(846
)

(784
)
Balances as of September 30, 2017
(354
)
 
(124
)
 
328

 
(150
)
Other comprehensive income/(loss) before reclassifications
(524
)
 
672

 
(4,563
)
 
(4,415
)
Amounts reclassified from AOCI
—

 
486

 
(20
)
 
466

Tax effect
(1
)
 
(253
)
 
1,177

 
923

Other comprehensive income/(loss)
(525
)

905


(3,406
)

(3,026
)
Cumulative effect of change in accounting principle (1)
(176
)
 
29

 
(131
)
 
(278
)
Balances as of September 29, 2018
$
(1,055
)

$
810


$
(3,209
)

$
(3,454
)
(1)
Refer to Note 4, “Income Taxes” for more information on the Company’s adoption of ASU 2018-02 in 2018.
 
Number of
RSUs
(in thousands)
 
Weighted-Average
Grant Date Fair
Value Per RSU
 
Aggregate Fair Value
(in millions)
Balance as of September 26, 2015
101,467

 
$
85.77

 
 
RSUs granted
49,468

 
$
109.28

 
 
RSUs vested
(46,313
)
 
$
84.44

 
 
RSUs canceled
(5,533
)
 
$
96.48

 
 
Balance as of September 24, 2016
99,089

 
$
97.54

 
 
RSUs granted
50,112

 
$
121.65

 
 
RSUs vested
(45,735
)
 
$
95.48

 
 
RSUs canceled
(5,895
)
 
$
106.87

 
 
Balance as of September 30, 2017
97,571

 
$
110.33

 
 
RSUs granted
45,351

 
$
162.86

 
 
RSUs vested
(44,718
)
 
$
111.24

 
 
RSUs canceled
(6,049
)
 
$
127.82

 
 
Balance as of September 29, 2018
92,155

 
$
134.60

 
$
20,803

 
2018
 
2017
 
2016
Cost of sales
$
1,010

 
$
877

 
$
769

Research and development
2,668

 
2,299

 
1,889

Selling, general and administrative
1,662

 
1,664

 
1,552

Total share-based compensation expense
$
5,340


$
4,840


$
4,210

 
2018
 
2017
 
2016
Beginning accrued warranty and related costs
$
3,834

 
$
3,702

 
$
4,780

Cost of warranty claims
(4,115
)
 
(4,322
)
 
(4,663
)
Accruals for product warranty
3,973

 
4,454

 
3,585

Ending accrued warranty and related costs
$
3,692


$
3,834


$
3,702

2019
$
1,298

2020
1,289

2021
1,218

2022
1,038

2023
800

Thereafter
3,984

Total
$
9,627

2019
$
2,447

2020
3,202

2021
1,749

2022
1,596

2023
268

Thereafter
66

Total
$
9,328

 
2018
 
2017
 
2016
Americas:
 
 
 
 
 
Net sales
$
112,093

 
$
96,600

 
$
86,613

Operating income
$
34,864

 
$
30,684

 
$
28,172

 
 
 
 
 
 
Europe:
 
 
 
 
 
Net sales
$
62,420

 
$
54,938

 
$
49,952

Operating income
$
19,955

 
$
16,514

 
$
15,348

 
 
 
 
 
 
Greater China:
 
 
 
 
 
Net sales
$
51,942

 
$
44,764

 
$
48,492

Operating income
$
19,742

 
$
17,032

 
$
18,835

 
 
 
 
 
 
Japan:
 
 
 
 
 
Net sales
$
21,733

 
$
17,733

 
$
16,928

Operating income
$
9,500

 
$
8,097

 
$
7,165

 
 
 
 
 
 
Rest of Asia Pacific:
 
 
 
 
 
Net sales
$
17,407

 
$
15,199

 
$
13,654

Operating income
$
6,181

 
$
5,304

 
$
4,781

 
2018
 
2017
 
2016
Segment operating income
$
90,242

 
$
77,631

 
$
74,301

Research and development expense
(14,236
)
 
(11,581
)
 
(10,045
)
Other corporate expenses, net
(5,108
)
 
(4,706
)
 
(4,232
)
Total operating income
$
70,898

 
$
61,344

 
$
60,024

 
2018
 
2017
 
2016
Net sales:
 
 
 
 
 
U.S.
$
98,061

 
$
84,339

 
$
75,667

China (1)
51,942

 
44,764

 
48,492

Other countries
115,592

 
100,131

 
91,480

Total net sales
$
265,595


$
229,234


$
215,639

 
2018
 
2017
Long-lived assets:
 
 
 
U.S.
$
23,963

 
$
20,637

China (1)
13,268

 
10,211

Other countries
4,073

 
2,935

Total long-lived assets
$
41,304

 
$
33,783

(1)
China includes Hong Kong and Taiwan. Long-lived assets located in China consist primarily of product tooling and manufacturing process equipment and assets related to retail stores and related infrastructure.
 
2018
 
2017
 
2016
iPhone (1)
$
166,699

 
$
141,319

 
$
136,700

iPad (1)
18,805

 
19,222

 
20,628

Mac (1)
25,484

 
25,850

 
22,831

Services (2)
37,190

 
29,980

 
24,348

Other Products (1)(3)
17,417

 
12,863

 
11,132

Total net sales
$
265,595


$
229,234


$
215,639

(1)
Includes deferrals and amortization of related software upgrade rights and non-software services.
(2)
Includes revenue from Digital Content and Services, AppleCare, Apple Pay, licensing and other services. Services net sales in 2018 included a favorable one-time item of $236 million in connection with the final resolution of various lawsuits. Services net sales in 2017 included a favorable one-time adjustment of $640 million due to a change in estimate based on the availability of additional supporting information.
(3)
Includes sales of AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch and other Apple-branded and third-party accessories.
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
2018:
 
 
 
 
 
 
 
Net sales
$
62,900

 
$
53,265

 
$
61,137

 
$
88,293

Gross margin
$
24,084

 
$
20,421

 
$
23,422

 
$
33,912

Net income
$
14,125

 
$
11,519

 
$
13,822

 
$
20,065

 
 
 
 
 
 
 
 
Earnings per share (1):
 
 
 
 
 
 
 
Basic
$
2.94

 
$
2.36

 
$
2.75

 
$
3.92

Diluted
$
2.91

 
$
2.34

 
$
2.73

 
$
3.89

 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
2017:
 
 
 
 
 
 
 
Net sales
$
52,579

 
$
45,408

 
$
52,896

 
$
78,351

Gross margin
$
19,931

 
$
17,488

 
$
20,591

 
$
30,176

Net income
$
10,714

 
$
8,717

 
$
11,029

 
$
17,891

 
 
 
 
 
 
 
 
Earnings per share (1):
 
 
 
 
 
 
 
Basic
$
2.08

 
$
1.68

 
$
2.11

 
$
3.38

Diluted
$
2.07

 
$
1.67

 
$
2.10

 
$
3.36

(1)
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
(a)
Documents filed as part of this report
(1)
All financial statements
Index to Consolidated Financial Statements
 
Page
Consolidated Statements of Operations for the years ended September 29, 2018, September 30, 2017 and September 24, 2016
 
38
Consolidated Statements of Comprehensive Income for the years ended September 29, 2018, September 30, 2017 and September 24, 2016
 
39
Consolidated Balance Sheets as of September 29, 2018 and September 30, 2017
 
40
Consolidated Statements of Shareholders’ Equity for the years ended September 29, 2018, September 30, 2017 and September 24, 2016
 
41
Consolidated Statements of Cash Flows for the years ended September 29, 2018, September 30, 2017 and September 24, 2016
 
42
Notes to Consolidated Financial Statements
 
43
Selected Quarterly Financial Information (Unaudited)
 
64
Reports of Independent Registered Public Accounting Firm
 
65
(2)
Financial Statement Schedules
(3)
Exhibits required by Item 601 of Regulation S-K (1) 
 
 
Incorporated by Reference
Exhibit Number
 
Exhibit Description
 
Form
 
Exhibit
 
Filing Date/
Period End Date
3.1
 
Restated Articles of Incorporation of the Registrant effective as of June 6, 2014.
 
8-K
 
3.1
 
6/6/14
3.2
 
Amended and Restated Bylaws of the Registrant effective as of December 13, 2016.
 
8-K
 
3.2
 
12/15/16
4.1
 
Form of Common Stock Certificate of the Registrant.
 
10-Q
 
4.1
 
12/30/06
4.2
 
Indenture, dated as of April 29, 2013, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as Trustee.
 
S-3
 
4.1
 
4/29/13
4.3
 
Officer’s Certificate of the Registrant, dated as of May 3, 2013, including forms of global notes representing the Floating Rate Notes due 2016, Floating Rate Notes due 2018, 0.45% Notes due 2016, 1.00% Notes due 2018, 2.40% Notes due 2023 and 3.85% Notes due 2043.
 
8-K
 
4.1
 
5/3/13
4.4
 
Officer’s Certificate of the Registrant, dated as of May 6, 2014, including forms of global notes representing the Floating Rate Notes due 2017, Floating Rate Notes due 2019, 1.05% Notes due 2017, 2.10% Notes due 2019, 2.85% Notes due 2021, 3.45% Notes due 2024 and 4.45% Notes due 2044.
 
8-K
 
4.1
 
5/6/14
4.5
 
Officer’s Certificate of the Registrant, dated as of November 10, 2014, including forms of global notes representing the 1.000% Notes due 2022 and 1.625% Notes due 2026.
 
8-K
 
4.1
 
11/10/14
4.6
 
Officer’s Certificate of the Registrant, dated as of February 9, 2015, including forms of global notes representing the Floating Rate Notes due 2020, 1.55% Notes due 2020, 2.15% Notes due 2022, 2.50% Notes due 2025 and 3.45% Notes due 2045.
 
8-K
 
4.1
 
2/9/15
4.7
 
Officer’s Certificate of the Registrant, dated as of May 13, 2015, including forms of global notes representing the Floating Rate Notes due 2017, Floating Rate Notes due 2020, 0.900% Notes due 2017, 2.000% Notes due 2020, 2.700% Notes due 2022, 3.200% Notes due 2025, and 4.375% Notes due 2045.
 
8-K
 
4.1
 
5/13/15
4.8
 
Officer’s Certificate of the Registrant, dated as of June 10, 2015, including forms of global notes representing the 0.350% Notes due 2020.
 
8-K
 
4.1
 
6/10/15
 
 
Incorporated by Reference
Exhibit Number
 
Exhibit Description
 
Form
 
Exhibit
 
Filing Date/
Period End Date
4.9
 
Officer’s Certificate of the Registrant, dated as of July 31, 2015, including forms of global notes representing the 3.05% Notes due 2029 and 3.60% Notes due 2042.
 
8-K
 
4.1
 
7/31/15
4.10
 
Officer’s Certificate of the Registrant, dated as of September 17, 2015, including forms of global notes representing the 1.375% Notes due 2024 and 2.000% Notes due 2027.
 
8-K
 
4.1
 
9/17/15
4.11
 
Officer’s Certificate of the Registrant, dated as of February 23, 2016, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2021, 1.300% Notes due 2018, 1.700% Notes due 2019, 2.250% Notes due 2021, 2.850% Notes due 2023, 3.250% Notes due 2026, 4.500% Notes due 2036 and 4.650% Notes due 2046.
 
8-K
 
4.1
 
2/23/16
4.12
 
Supplement No. 1 to the Officer’s Certificate of the Registrant, dated as of March 24, 2016.
 
8-K
 
4.1
 
3/24/16
4.13
 
Officer’s Certificate of the Registrant, dated as of June 22, 2016, including form of global note representing 4.15% Notes due 2046.
 
8-K
 
4.1
 
6/22/16
4.14
 
Officer’s Certificate of the Registrant, dated as of August 4, 2016, including forms of global notes representing the Floating Rate Notes due 2019, 1.100% Notes due 2019, 1.550% Notes due 2021, 2.450% Notes due 2026 and 3.850% Notes due 2046.
 
8-K
 
4.1
 
8/4/16
4.15
 
Officer’s Certificate of the Registrant, dated as of February 9, 2017, including forms of global notes representing the Floating Rate Notes due 2019, Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.550% Notes due 2019, 1.900% Notes due 2020, 2.500% Notes due 2022, 3.000% Notes due 2024, 3.350% Notes due 2027 and 4.250% Notes due 2047.
 
8-K
 
4.1
 
2/9/17
4.16
 
Officer’s Certificate of the Registrant, dated as of March 3, 2017, including form of global note representing 4.300% Notes due 2047.
 
8-K
 
4.1
 
3/3/17
4.17
 
Officer’s Certificate of the Registrant, dated as of May 11, 2017, including forms of global notes representing the Floating Rate Notes due 2020, Floating Rate Notes due 2022, 1.800% Notes due 2020, 2.300% Notes due 2022, 2.850% Notes due 2024 and 3.200% Notes due 2027.
 
8-K
 
4.1
 
5/11/17
4.18
 
Officer’s Certificate of the Registrant, dated as of May 24, 2017, including forms of global notes representing the 0.875% Notes due 2025 and 1.375% Notes due 2029.
 
8-K
 
4.1
 
5/24/17
4.19
 
Officer’s Certificate of the Registrant, dated as of June 20, 2017, including form of global note representing the 3.000% Notes due 2027.
 
8-K
 
4.1
 
6/20/17
4.20
 
Officer’s Certificate of the Registrant, dated as of August 18, 2017, including form of global note representing the 2.513% Notes due 2024.
 
8-K
 
4.1
 
8/18/17
4.21
 
Officer’s Certificate of the Registrant, dated as of September 12, 2017, including forms of global notes representing the 1.500% Notes due 2019, 2.100% Notes due 2022, 2.900% Notes due 2027 and 3.750% Notes due 2047.
 
8-K
 
4.1
 
9/12/17
4.22
 
Officer’s Certificate of the Registrant, dated as of November 13, 2017, including forms of global notes representing the 1.800% Notes due 2019, 2.000% Notes due 2020, 2.400% Notes due 2023, 2.750% Notes due 2025, 3.000% Notes due 2027 and 3.750% Notes due 2047.
 
8-K
 
4.1
 
11/13/17
4.23*
 
Apple Inc. Deferred Compensation Plan.
 
S-8
 
4.1
 
8/23/18
10.1*
 
Employee Stock Purchase Plan, as amended and restated as of March 10, 2015.
 
8-K
 
10.1
 
3/13/15
10.2*
 
Form of Indemnification Agreement between the Registrant and each director and executive officer of the Registrant.
 
10-Q
 
10.2
 
6/27/09
10.3*
 
Apple Inc. Non-Employee Director Stock Plan, as amended and restated as of February 13, 2018.
 
8-K
 
10.1
 
2/14/18
10.4*
 
2003 Employee Stock Plan, as amended through February 25, 2010.
 
8-K
 
10.1
 
3/1/10
10.5*
 
Form of Restricted Stock Unit Award Agreement under 2003 Employee Stock Plan effective as of November 16, 2010.
 
10-Q
 
10.10
 
12/25/10
10.6*
 
2014 Employee Stock Plan, as amended and restated as of October 1, 2017.
 
10-K
 
10.8
 
9/30/17
10.7*
 
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of August 26, 2014.
 
10-K
 
10.11
 
9/27/14
10.8*
 
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of August 26, 2014.
 
10-K
 
10.12
 
9/27/14
 
 
Incorporated by Reference
Exhibit Number
 
Exhibit Description
 
Form
 
Exhibit
 
Filing Date/
Period End Date
10.9*
 
Form of Amendment, effective as of August 26, 2014, to Restricted Stock Unit Award Agreements and Performance Award Agreements outstanding as of August 26, 2014.
 
10-K
 
10.13
 
9/27/14
10.10*
 
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of October 5, 2015.
 
10-Q
 
10.16
 
3/26/16
10.11*
 
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of October 5, 2015.
 
10-Q
 
10.17
 
3/26/16
10.12*
 
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of October 14, 2016.
 
10-K
 
10.18
 
9/24/16
10.13*
 
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of October 14, 2016.
 
10-K
 
10.19
 
9/24/16
10.14*
 
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of September 26, 2017.
 
10-K
 
10.20
 
9/30/17
10.15*
 
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of September 26, 2017.
 
10-K
 
10.21
 
9/30/17
10.16*
 
Form of Restricted Stock Unit Award Agreement under Non-Employee Director Stock Plan effective as of February 13, 2018.
 
10-Q
 
10.2
 
3/31/18
10.17*, **
 
Form of Restricted Stock Unit Award Agreement under 2014 Employee Stock Plan effective as of August 21, 2018.
 
 
 
 
 
 
10.18*, **
 
Form of Performance Award Agreement under 2014 Employee Stock Plan effective as of August 21, 2018.
 
 
 
 
 
 
21.1**
 
Subsidiaries of the Registrant.
 
 
 
 
 
 
23.1**
 
Consent of Independent Registered Public Accounting Firm.
 
 
 
 
 
 
24.1**
 
Power of Attorney (included on the Signatures page of this Annual Report on Form 10-K).
 
 
 
 
 
 
31.1**
 
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.
 
 
 
 
 
 
31.2**
 
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.
 
 
 
 
 
 
32.1***
 
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
 
 
 
 
 
 
101.INS**
 
XBRL Instance Document.
 
 
 
 
 
 
101.SCH**
 
XBRL Taxonomy Extension Schema Document.
 
 
 
 
 
 
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
 
 
 
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
 
 
 
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
 
 
 
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
 
 
 
*
Indicates management contract or compensatory plan or arrangement.
**
Filed herewith.
***
Furnished herewith.
(1)
Certain instruments defining the rights of holders of long-term debt securities of the Registrant are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
Item 16.
Form 10-K Summary
 
Apple Inc.
 
 
 
 
 
By:
 
/s/ Luca Maestri
 
 
 
Luca Maestri
 
 
 
Senior Vice President,
Chief Financial Officer
Name
 
Title
 
Date
 
 
 
 
 
/s/ Timothy D. Cook
 
Chief Executive Officer and Director
(Principal Executive Officer)
 
November 5, 2018
TIMOTHY D. COOK
 
 
 
 
 
 
 
 
/s/ Luca Maestri
 
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
 
November 5, 2018
LUCA MAESTRI
 
 
 
 
 
 
 
 
/s/ Chris Kondo
 
Senior Director of Corporate Accounting
(Principal Accounting Officer)
 
November 5, 2018
CHRIS KONDO
 
 
 
 
 
 
 
 
/s/ James A. Bell
 

Director
 
November 5, 2018
JAMES A. BELL
 
 
 
 
 
 
 
 
/s/ Al Gore
 

Director
 
November 5, 2018
AL GORE
 
 
 
 
 
 
 
 
/s/ Robert A. Iger
 

Director
 
November 5, 2018
ROBERT A. IGER
 
 
 
 
 
 
 
 
/s/ Andrea Jung
 

Director
 
November 5, 2018
ANDREA JUNG
 
 
 
 
 
 
 
 
/s/ Arthur D. Levinson
 

Director
 
November 5, 2018
ARTHUR D. LEVINSON
 
 
 
 
 
 
 
 
/s/ Ronald D. Sugar
 

Director
 
November 5, 2018
RONALD D. SUGAR
 
 
 
 
 
 
 
 
/s/ Susan L. Wagner
 

Director
 
November 5, 2018
SUSAN L. WAGNER
 
 
 

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

WASHINGTON

 

91-1144442

(STATE OF INCORPORATION)

 

(I.R.S. ID)

Large accelerated filer ☒

 

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

 

Smaller reporting company ☐

Emerging growth company ☐

 

 

 

 

 

 

 

Page

 

 

 

 

 

PART I

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Business

 

3

 

 

 

 

 

 

 

 

 

Executive Officers of the Registrant

 

15

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

17

 

 

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

29

 

 

 

 

 

 

 

Item 2.

 

Properties

 

29

 

 

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

29

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

29

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

30

 

 

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

31

 

 

 

 

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

32

 

 

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

50

 

 

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

51

 

 

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

98

 

 

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

98

 

 

 

 

 

 

 

 

 

Report of Management on Internal Control over Financial Reporting

 

98

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

99

 

 

 

 

 

 

 

Item 9B.

 

Other Information

 

100

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

100

 

 

 

 

 

 

 

Item 11.

 

Executive Compensation

 

100

 

 

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

100

 

 

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

100

 

 

 

 

 

 

 

Item 14.

 

Principal Accounting Fees and Services

 

100

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

101

 

 

 

 

 

 

 

Item 16.

 

Form 10-K Summary

 

105

 

 

 

 

 

 

 

 

 

 

 

 

 

Signatures

 

106

 

 

•

Reinvent productivity and business processes.

 

•

Build the intelligent cloud platform.

 

•

Create more personal computing.

 

•

Transforming the workplace to deliver new modern, modular business applications to improve how people communicate, collaborate, learn, work, play, and interact with one another.

 

•

Building and running cloud-based services in ways that unleash new experiences and opportunities for businesses and individuals.

 

•

Applying AI to drive insights and act on our customer’s behalf by understanding and interpreting their needs using natural methods of communication.

 

•

Using Windows to develop new categories of devices – both our own and third-party – as a person’s experience with technology becomes more natural, personal, and predictive with multi-sensory breakthroughs in voice, ink, gaze interactions, and augmented reality holograms.

 

•

Inventing new gaming experiences that bring people together around their shared love for games on any devices and pushing the boundaries of innovation with console and PC gaming by creating the next wave of entertainment.

 

•

Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Skype for Business, and Microsoft Teams, and related Client Access Licenses (“CALs”).

 

•

Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.

 

•

LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.

 

•

Dynamics business solutions, including Dynamics ERP on-premises, Dynamics CRM on-premises, and Dynamics 365, a set of cloud-based applications across ERP and CRM.

 

•

Server products and cloud services, including SQL Server, Windows Server, Visual Studio, System Center, and related CALs, and Azure.

 

•

Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

 

•

Windows, including Windows OEM licensing (“Windows OEM”) and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows IoT; and MSN advertising.

 

•

Devices, including Surface, PC accessories, and other intelligent devices.

 

•

Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, and advertising (“Xbox Live”), video games, and third-party video game royalties.

 

•

Search.

 

•

The mix of computing devices based on form factor and screen size.

 

•

Differences in device market demand between developed markets and growth markets.

 

•

Attachment of Windows to devices shipped.

 

•

Customer mix between consumer, small and medium businesses, and large enterprises.

 

•

Changes in inventory levels in the OEM channel.

 

•

Pricing changes and promotions, pricing variation that occurs when the mix of devices manufactured shifts from local and regional system builders to large multinational OEMs, and different pricing of Windows versions licensed.

 

•

Piracy.

 

•

Cloud and AI Platform, focuses on making IT professionals, developers, and their systems more productive and efficient through development of cloud infrastructure, server, database, CRM, ERP, management and development tools, AI cognitive services, and other business process applications and services for enterprises.

 

•

Experiences and Devices, focuses on instilling a unifying product ethos across our end-user experiences and devices, including Office, Windows, Enterprise Mobility and Management, and devices.

 

•

AI and Research, focuses on our AI innovations and other forward-looking research and development efforts spanning infrastructure, services, applications, and search.

 

•

LinkedIn, focuses on our services that transform the way customers hire, market, sell, and learn.

 

•

Gaming, focuses on connecting gaming assets across the range of devices to grow and engage the Xbox Live member network through game experiences, streaming content, and social interaction.

Name

 

Age

 

 

Position with the Company

  

 

 

 

Satya Nadella

 

 

50

 

 

Chief Executive Officer

Christopher C. Capossela

 

 

48

 

 

Executive Vice President, Marketing and Consumer Business, and Chief Marketing Officer

Jean-Philippe Courtois

 

 

57

 

 

Executive Vice President and President, Microsoft Global Sales, Marketing and Operations

Kathleen T. Hogan

 

 

52

 

 

Executive Vice President, Human Resources

Amy E. Hood

 

 

46

 

 

Executive Vice President, Chief Financial Officer

Margaret L. Johnson

 

 

56

 

 

Executive Vice President, Business Development

Bradford L. Smith

 

 

59

 

 

President and Chief Legal Officer

  

 

•

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to the Securities and Exchange Commission (“SEC”).

 

•

Information on our business strategies, financial results, and metrics for investors.

 

•

Announcements of investor conferences, speeches, and events at which our executives talk about our product, service, and competitive strategies. Archives of these events are also available.

 

•

Press releases on quarterly earnings, product and service announcements, legal developments, and international news.

 

•

Corporate governance information including our articles of incorporation, bylaws, governance guidelines, committee charters, codes of conduct and ethics, global corporate social responsibility initiatives, and other governance-related policies.

 

•

Other news and announcements that we may post from time to time that investors might find useful or interesting.

 

•

Opportunities to sign up for email alerts to have information pushed in real time.

 

•

A competing vertically-integrated model, in which a single firm controls the software and hardware elements of a product and related services, has succeeded with some consumer products such as personal computers, tablets, phones, gaming consoles, and wearables. Competitors pursuing this model also earn revenue from services integrated with the hardware and software platform, including applications and content sold through their integrated marketplaces. They may also be able to claim security and performance benefits from their vertically integrated offer. We also offer some vertically-integrated hardware and software products and services. To the extent we shift a portion of our business to a vertically integrated model we increase our cost of revenue and reduce our operating margins.

 

•

We derive substantial revenue from licenses of Windows operating systems on personal computers. We face significant competition from competing platforms developed for new devices and form factors such as smartphones and tablet computers. These devices compete on multiple bases including price and the perceived utility of the device and its platform. Users are increasingly turning to these devices to perform functions that in the past were performed by personal computers. Even if many users view these devices as complementary to a personal computer, the prevalence of these devices may make it more difficult to attract application developers to our PC operating system platforms. Competing with operating systems licensed at low or no cost may decrease our PC operating system margins. Popular products or services offered on competing platforms could increase their competitive strength. In addition, some of our devices compete with products made by our original equipment manufacturer (“OEM”) partners, which may affect their commitment to our platform.

 

•

Competing platforms have content and application marketplaces with scale and significant installed bases. The variety and utility of content and applications available on a platform are important to device purchasing decisions. Users sometimes incur costs to move data and buy new content and applications when switching platforms. To compete, we must successfully enlist developers to write applications for our platform and ensure that these applications have high quality, security, customer appeal, and value. Efforts to compete with competitors’ content and application marketplaces may increase our cost of revenue and lower our operating margins.

 

•

Even as we transition more of our business to infrastructure-, platform-, and software-as-a-service business model, the license-based proprietary software model generates a substantial portion of our software revenue. We bear the costs of converting original ideas into software products through investments in research and development, offsetting these costs with the revenue received from licensing our products. Many of our competitors also develop and sell software to businesses and consumers under this model.

 

•

Other competitors develop and offer free applications, online services and content, and make money by selling third-party advertising. Advertising revenue funds development of products and services these competitors provide to users at no or little cost, competing directly with our revenue-generating products.

 

•

Some companies compete with us using an open source business model by modifying and then distributing open source software at nominal cost to end-users, and earning revenue on advertising or complementary services and products. These firms do not bear the full costs of research and development for the software. Some open source software vendors develop software that mimics the features and functionality of our products.

 

•

Continuing to bring to market compelling cloud-based experiences that generate increasing traffic and market share.

 

•

Maintaining the utility, compatibility, and performance of our cloud-based services on the growing array of computing devices, including PCs, smartphones, tablets, gaming consoles, and other devices, as well as sensors and other endpoints.

 

•

Continuing to enhance the attractiveness of our cloud platforms to third-party developers.

 

•

Ensuring our cloud-based services meet the reliability expectations of our customers and maintain the security of their data.

 

•

Making our suite of cloud-based services platform-agnostic, available on a wide range of devices and ecosystems, including those of our competitors.

 

•

We may have to choose between withdrawing products from certain geographies to avoid fines or designing and developing alternative versions of those products to comply with government rulings, which may entail a delay in a product release and removing functionality that customers want or on which developers rely.

 

•

We may be required to make available licenses to our proprietary technologies on terms that do not reflect their fair market value or do not protect our associated intellectual property.

 

•

We are subject to a variety of ongoing commitments because of court or administrative orders, consent decrees, or other voluntary actions we have taken. If we fail to comply with these commitments, we may incur litigation costs and be subject to substantial fines or other remedial actions.

 

•

Our ability to realize anticipated Windows 10 post-sale monetization opportunities may be limited.

 

•

The introduction of new features, products, services, or terms of service that customers, users, or partners do not like.

 

•

Public scrutiny of our decisions regarding user privacy, data practices, or content.

 

•

Data security breaches, compliance failures, or actions of partners or individual employees.

(Square feet in millions)

 

 

 

 

 

 

 

 

Location

 

Owned

 

 

Leased

 

 

Total

 

 

 

 

 

U.S.

 

 

18

 

 

 

13

 

 

 

31

 

International

 

 

6

 

 

 

13

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 24

 

 

 

26

 

 

 

  50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

September 30

 

 

December 31

 

 

March 31

 

 

June 30

 

 

Fiscal Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

  75.97

 

 

$

  87.50

 

 

$

  97.24

 

 

$

  102.69

 

 

$

  102.69

 

Low

 

 

  68.02

 

 

 

  73.71

 

 

 

  83.83

 

 

 

  87.51

 

 

 

  68.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

  58.70

 

 

$

  64.10

 

 

$

  66.19

 

 

$

  72.89

 

 

$

  72.89

 

Low

 

 

  50.39

 

 

 

  56.32

 

 

 

  61.95

 

 

 

  64.85

 

 

 

  50.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number
of Shares

Purchased

 

 

Average

Price Paid
per Share

 

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs

 

 

Approximate Dollar Value of

Shares that May Yet be

Purchased under the Plans
or Programs

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

April 1, 2018 – April 30, 2018

 

 

  10,320,190

 

 

$

  93.11

 

 

 

  10,320,190

 

 

$

  29,339

 

May 1, 2018 – May 31, 2018

 

 

  0

 

 

 

  0

 

 

 

  0

 

 

 

  29,339

 

June 1, 2018 – June 30, 2018

 

 

  11,335,224

 

 

 

  100.49

 

 

 

  11,335,224

 

 

 

  28,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  21,655,414

 

 

 

 

 

 

 

  21,655,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2018

 

 

 

2017

(b)(c)

 

 

2016

(b)

 

 

2015

 

 

 

2014

(h)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

110,360

 

 

$

96,571

 

 

$

91,154

 

 

$

93,580

 

 

$

86,833

 

Gross margin

 

 

72,007

 

 

 

62,310

 

 

 

58,374

 

 

 

60,542

 

 

 

59,755

 

Operating income

 

 

35,058

 

 

 

29,025

(d)

 

 

26,078

(e)

 

 

18,161

(g)

 

 

27,759

 

Net income

 

 

16,571

(a)

 

 

25,489

(d)

 

 

20,539

(e)

 

 

12,193

(g)

 

 

22,074

 

Diluted earnings per share

 

 

  2.13

(a)

 

 

3.25

(d)

 

 

2.56

(e)

 

 

1.48

(g)

 

 

2.63

 

Cash dividends declared per share

 

 

1.68

 

 

 

1.56

 

 

 

1.44

 

 

 

1.24

 

 

 

1.12

 

Cash, cash equivalents, and short-term investments

 

 

133,768

 

 

 

132,981

 

 

 

113,240

 

 

 

96,526

 

 

 

85,709

 

Total assets

 

 

  258,848

 

 

 

  250,312

 

 

 

  202,897

(f)

 

 

  174,303

(f)

 

 

  170,569

(f)

Long-term obligations

 

 

117,642

 

 

 

106,856

 

 

 

66,705

(f)

 

 

44,574

(f)

 

 

35,285

(f)

Stockholders’ equity

 

 

82,718

 

 

 

  87,711

 

 

 

83,090

 

 

 

80,083

 

 

 

89,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes a $13.7 billion net charge related to the Tax Cuts and Jobs Act, which decreased net income and diluted earnings per share (“EPS”) by $13.7 billion and $1.75, respectively. Refer to Note 13 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.

(b)

Reflects the impact of the adoption of new accounting standards in fiscal year 2018 related to revenue recognition and leases. Refer to Note 1 – Accounting Policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.

(c)

On December 8, 2016, we acquired LinkedIn Corporation. LinkedIn has been included in our consolidated results of operations starting on the acquisition date.

(d)

Includes $306 million of employee severance expenses primarily related to our sales and marketing restructuring plan, which decreased operating income, net income, and diluted EPS by $306 million, $243 million, and $0.04, respectively.   

(e)

Includes $630 million of asset impairment charges related to our Phone business, and $480 million of restructuring charges associated with our Phone business restructuring plans, which together decreased operating income, net income, and diluted EPS by $1.1 billion, $895 million, and $0.11, respectively.

(f)

Reflects the impact of the adoption of the new accounting standard in fiscal year 2017 related to balance sheet classification of debt issuance costs.

(g)

Includes $7.5 billion of goodwill and asset impairment charges related to our Phone business, and $2.5 billion of integration and restructuring expenses, primarily associated with our Phone business restructuring plans, which together decreased operating income, net income, and diluted EPS by $10.0 billion, $9.5 billion, and $1.15, respectively.

(h)

On April 25, 2014, we acquired substantially all of Nokia Corporation’s Devices and Services business (“NDS”). NDS has been included in our consolidated results of operations starting on the acquisition date.

 

•

Commercial cloud revenue, which primarily comprises Microsoft Office 365 commercial, Microsoft Azure, Microsoft Dynamics 365, and other cloud properties, increased 56% to $23.2 billion.

 

•

Office Commercial revenue increased 11%, driven by Office 365 commercial revenue growth of 41%.

 

•

Office Consumer revenue increased 11% and Office 365 consumer subscribers increased to 31.4 million.

 

•

LinkedIn contributed revenue of $5.3 billion, driven by strong momentum across all business lines.

 

•

Dynamics revenue increased 13%, driven by Dynamics 365 revenue growth of 65%.

 

•

Server products and cloud services revenue increased 21%, driven by Azure revenue growth of 91%.

 

•

Enterprise Services revenue increased 5%.

 

•

Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased 5%, driven by OEM Pro revenue growth of 11%.

 

•

Windows Commercial revenue increased 12%, driven by an increased volume of multi-year agreements.

 

•

Gaming revenue increased 14%, driven by Xbox software and services revenue growth of 20%, mainly from third-party title strength.

 

•

Microsoft Surface revenue increased 16%, driven by a higher mix of premium devices and an increase in volumes sold, due to the latest editions of Surface.

 

•

Search advertising revenue, excluding traffic acquisition costs, increased 16%, driven by higher revenue per search and search volume.

(In millions, except percentages and per share amounts)

 

2018

 

 

2017

 

 

2016

 

 

Percentage
Change 2018
Versus 2017

 

 

Percentage
Change 2017
Versus 2016

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

110,360

 

 

$

96,571

 

 

$

91,154

 

 

 

14%

 

 

 

6%

 

Gross margin

 

 

72,007

 

 

 

62,310

 

 

 

58,374

 

 

 

16%

 

 

 

7%

 

Operating income

 

 

35,058

 

 

 

29,025

 

 

 

26,078

 

 

 

21%

 

 

 

11%

 

Net Income

 

 

16,571

 

 

 

25,489

 

 

 

20,539

 

 

 

(35)%

 

 

 

24%

 

Diluted earnings per share

 

 

2.13

 

 

 

3.25

 

 

 

2.56

 

 

 

(34)%

 

 

 

27%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating income

 

 

35,058

 

 

 

29,331

 

 

 

27,188

 

 

 

20%

 

 

 

8%

 

Adjusted net income

 

 

30,267

 

 

 

25,732

 

 

 

21,434

 

 

 

18%

 

 

 

20%

 

Adjusted diluted earnings per share

 

 

3.88

 

 

 

3.29

 

 

 

2.67

 

 

 

18%

 

 

 

23%

 

 

 

 

•

Cost of revenue increased $4.1 billion or 12%, mainly due to growth in our commercial cloud, Gaming, LinkedIn, and Search advertising, offset in part by a reduction in Phone cost of revenue.

 

•

Sales and marketing expenses increased $2.0 billion or 13%, primarily due to LinkedIn expenses and investments in commercial sales capacity, offset in part by a decrease in Windows marketing expenses.

 

•

Research and development expenses increased $1.7 billion or 13%, primarily due to investments in cloud engineering and LinkedIn expenses.

 

•

General and administrative expenses increased $273 million or 6%, primarily due to LinkedIn expenses.

 

•

Cost of revenue increased $1.5 billion or 5%, mainly due to growth in our commercial cloud, the acquisition of LinkedIn, and higher Search advertising traffic acquisition costs, offset in part by a reduction in Phone sales and Gaming cost of revenue.

 

•

Research and development expenses increased $1.0 billion or 9%, primarily due to LinkedIn expenses and increased investments in cloud engineering, offset in part by a reduction in Phone expenses.

 

•

Sales and marketing expenses increased $826 million or 6%, primarily due to LinkedIn expenses and increased investments in sales capacity for our commercial cloud, offset in part by a reduction in Phone and marketing expenses.

 

•

Impairment and restructuring expenses decreased $804 million, driven by asset impairment charges and restructuring charges related to our Phone business in fiscal year 2016, offset in part by employee severance expenses primarily related to our sales and marketing restructuring plan in fiscal year 2017.

(In millions, except percentages)

 

2018

 

 

2017

 

 

2016

 

 

Percentage
Change 2018
Versus 2017

 

 

Percentage
Change 2017
Versus 2016

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

35,865

 

 

$

29,870

 

 

$

25,792

 

 

 

20%

 

 

 

16%

 

Intelligent Cloud

 

 

32,219

 

 

 

27,407

 

 

 

24,952

 

 

 

18%

 

 

 

10%

 

More Personal Computing

 

 

42,276

 

 

 

39,294

 

 

 

40,410

 

 

 

8%

 

 

 

(3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

110,360

 

 

$

96,571

 

 

$

91,154

 

 

 

14%

 

 

 

6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

12,924

 

 

$

11,389

 

 

$

11,756

 

 

 

13%

 

 

 

(3)%

 

Intelligent Cloud

 

 

11,524

 

 

 

9,127

 

 

 

9,249

 

 

 

26%

 

 

 

(1)%

 

More Personal Computing

 

 

10,610

 

 

 

8,815

 

 

 

6,183

 

 

 

20%

 

 

 

43%

 

Corporate and Other

 

 

0

 

 

 

(306

)

 

 

(1,110

)

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

35,058

 

 

$

29,025

 

 

$

26,078

 

 

 

21%

 

 

 

11%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Not meaningful

 

•

LinkedIn revenue increased $3.0 billion to $5.3 billion. Fiscal year 2018 includes a full period of results, whereas fiscal year 2017 only includes results from the date of acquisition on December 8, 2016. LinkedIn revenue primarily consisted of revenue from Talent Solutions.

 

•

Office Commercial revenue increased $2.4 billion or 11%, driven by Office 365 commercial revenue growth, mainly due to growth in subscribers and average revenue per user, offset in part by lower revenue from products licensed on-premises, reflecting a continued shift to Office 365 commercial.

 

•

Office Consumer revenue increased $382 million or 11%, driven by Office 365 consumer revenue growth, mainly due to growth in subscribers.

 

•

Dynamics revenue increased 13%, driven by Dynamics 365 revenue growth.

 

•

Gross margin increased $4.4 billion or 19%, driven by LinkedIn and growth in Office commercial. Gross margin percentage decreased slightly, due to an increased mix of cloud offerings, offset in part by gross margin percentage improvement in Office 365 commercial and LinkedIn. LinkedIn cost of revenue increased $818 million to $1.7 billion, including $888 million of amortization for acquired intangible assets.

 

•

Operating expenses increased $2.9 billion or 25%, driven by LinkedIn expenses and investments in commercial sales capacity and cloud engineering. LinkedIn operating expenses increased $2.2 billion to $4.5 billion, including $617 million of amortization of acquired intangible assets.

 

•

Server products and cloud services revenue increased $4.5 billion or 21%, driven by Azure and server products licensed on-premises revenue growth. Azure revenue growth of 91%, due to higher infrastructure-as-a-service and platform-as-a-service consumption-based and per user-based services. Server products licensed on-premises revenue increased 5%, mainly due to a higher mix of premium licenses for Windows Server and Microsoft SQL Server.

 

•

Enterprise Services revenue increased $304 million or 5%, driven by higher revenue from Premier Support Services and Microsoft Consulting Services, offset in part by a decline in revenue from custom support agreements.

 

•

Gross margin increased $3.1 billion or 16%, driven by growth in server products and cloud services revenue and cloud services scale and efficiencies. Gross margin percentage decreased, due to an increased mix of cloud offerings, offset in part by gross margin percentage improvement in Azure.

 

•

Operating expenses increased $683 million or 7%, driven by investments in commercial sales capacity and cloud engineering.

 

•

Windows revenue increased $925 million or 5%, driven by growth in Windows Commercial and Windows OEM, offset by a decline in patent licensing revenue. Windows Commercial revenue increased 12%, driven by multi-year agreement revenue growth. Windows OEM revenue increased 5%. Windows OEM Pro revenue grew 11%, ahead of a strengthening commercial PC market. Windows OEM non-Pro revenue declined 4%, below the consumer PC market, driven by continued pressure in the entry-level price category.

 

•

Gaming revenue increased $1.3 billion or 14%, driven by Xbox software and services revenue growth of 20%, mainly from third-party title strength.

 

•

Search advertising revenue increased $793 million or 13%. Search advertising revenue, excluding traffic acquisition costs, increased 16%, driven by growth in Bing, due to higher revenue per search and search volume.

 

•

Surface revenue increased $625 million or 16%, driven by a higher mix of premium devices and an increase in volumes sold, due to the latest editions of Surface.

 

•

Phone revenue decreased $525 million.

 

•

Gross margin increased $2.2 billion or 11%, driven by growth in Windows, Surface, Search, and Gaming. Gross margin percentage increased, primarily due to gross margin percentage improvement in Surface.

 

•

Operating expenses increased $391 million or 3%, driven by investments in Search, artificial intelligence, and Gaming engineering and commercial sales capacity, offset in part by a decrease in Windows marketing expenses.

 

•

LinkedIn revenue was $2.3 billion, primarily comprised of revenue from Talent Solutions.

 

•

Office Commercial revenue increased $1.4 billion or 7%, driven by higher revenue from Office 365 commercial, mainly due to growth in subscribers, offset in part by lower revenue from products licensed on-premises, reflecting a continued shift to Office 365 commercial.

 

•

Office Consumer revenue increased $351 million or 11%, driven by higher revenue from Office 365 consumer, mainly due to growth in subscribers.

 

•

Dynamics revenue increased 5%, primarily due to higher revenue from Dynamics 365.

 

•

Operating expenses increased $2.3 billion or 26%, mainly due to LinkedIn and cloud engineering expenses. Operating expenses included $2.3 billion related to our acquisition of LinkedIn, including $359 million of amortization of acquired intangible assets. Sales and marketing expenses increased $1.2 billion or 24%, research and development expenses increased $955 million or 35%, and general and administrative expenses increased $212 million or 14%.

 

•

Gross margin increased $2.0 billion or 9%, primarily due to our acquisition of LinkedIn. Gross margin percentage decreased, due to an increased mix of cloud offerings and amortization of acquired intangible assets related to LinkedIn. Cost of revenue included $918 million related to our acquisition of LinkedIn, including $507 million of amortization of acquired intangible assets.

 

•

Server products and cloud services revenue grew $2.6 billion or 14%, driven by Azure revenue growth of 98% and server products licensed on-premises revenue growth of 5%.

 

•

Enterprise Services revenue decreased 2%, driven by a decline in revenue from custom support agreements, offset in part by higher revenue from Premier Support Services and Microsoft Consulting Services.

 

•

Operating expenses increased $975 million or 11%, driven by investments in sales capacity, cloud engineering, and developer engagement. Sales and marketing expenses increased $549 million or 13%, research and development expenses increased $468 million or 14%, and general and administrative expenses decreased $42 million or 3%.

 

•

Gross margin increased $853 million or 5%, driven by growth in server products and cloud services revenue and cloud services scale and efficiencies, offset in part by a decline in Enterprise Services gross margin. Gross margin percentage decreased, due to an increased mix of cloud offerings and lower Enterprise Services gross margin percent, offset by improvement in Azure gross margin percent.

 

•

Windows revenue increased $1.0 billion or 6%, mainly due to higher revenue from Windows Commercial and Windows OEM. Windows Commercial revenue grew 14%, driven by multi-year agreement revenue. Windows OEM revenue increased 3%. Windows OEM Pro revenue grew 4%, outperforming the commercial PC market, primarily due to a higher mix of premium licenses sold. Windows OEM non-Pro revenue grew 3%, outperforming the consumer PC market, primarily due to a higher mix of premium devices sold.

 

•

Search advertising revenue increased $791 million or 15%. Search advertising revenue, excluding traffic acquisition costs, increased 9%, primarily driven by growth in Bing, due to higher revenue per search and search volume.

 

•

Gaming revenue decreased slightly, primarily due to lower Xbox hardware revenue, offset in part by higher revenue from Xbox software and services. Xbox hardware revenue decreased 21%, mainly due to lower prices of consoles sold and a decline in volume of consoles sold. Xbox software and services revenue increased 11%, driven by a higher volume of Xbox Live transactions and revenue per transaction.

 

•

Surface revenue decreased $82 million or 2%, primarily due to a reduction in volumes sold, offset in part by a higher mix of premium devices.

 

•

Phone revenue decreased $2.8 billion.

 

•

Operating expenses decreased $1.5 billion or 12%, driven by a reduction in Phone expenses and Surface launch-related expenses in the prior year. Sales and marketing expenses decreased $893 million or 16%, research and development expenses decreased $374 million or 6%, and general and administrative expenses decreased $252 million or 16%.

 

•

Gross margin increased $1.1 billion or 6%, driven by growth in Windows, Search advertising, and Gaming, offset in part by a decline in Phone and Surface. Gross margin percentage increased, due to favorable sales mix and gross margin percent improvements across Windows, Gaming, and Search advertising, offset by a gross margin percent decline in Devices.

(In millions, except percentages)

 

2018

 

 

2017

 

 

2016

 

 

Percentage
Change 2018
Versus 2017

 

 

Percentage
Change 2017
Versus 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

14,726

 

 

$

13,037

 

 

$

  11,988

 

 

 

13%

 

 

 

9%

 

As a percent of revenue

 

 

13%

 

 

 

13%

 

 

 

13%

 

 

 

0ppt

 

 

 

0ppt

 

 

 

(In millions, except percentages)

 

2018

 

 

2017

 

 

2016

 

 

Percentage
Change 2018
Versus 2017

 

 

Percentage
Change 2017
Versus 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

17,469

 

 

$

15,461

 

 

$

  14,635

 

 

 

13%

 

 

 

6%

 

As a percent of revenue

 

 

16%

 

 

 

16%

 

 

 

16%

 

 

 

0ppt

 

 

 

0ppt

 

 

 

(In millions, except percentages)

 

2018

 

 

2017

 

 

2016

 

 

Percentage
Change 2018 Versus 2017

 

 

Percentage
Change 2017
Versus 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

4,754

 

 

$

4,481

 

 

$

  4,563

 

 

 

6%

 

 

 

(2)%

 

As a percent of revenue

 

 

4%

 

 

 

5%

 

 

 

5%

 

 

 

(1)ppt

 

 

 

0ppt

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2018

 

 

 

2017

 

 

 

2016

 

 

 

 

 

Dividends and interest income

 

$

2,214

 

 

$

1,387

 

 

$

903

 

Interest expense

 

 

(2,733

)

 

 

(2,222

)

 

 

  (1,243

)

Net recognized gains on investments

 

 

2,399

 

 

 

2,583

 

 

 

668

 

Net losses on derivatives

 

 

(187

)

 

 

(510

)

 

 

(443

)

Net losses on foreign currency remeasurements

 

 

(218

)

 

 

(111

)

 

 

(129

)

Other, net

 

 

(59

)

 

 

(251

)

 

 

(195

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

   1,416

 

 

$

   876

 

 

$

   (439

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except percentages and per share amounts)

 

2018

 

 

2017

 

 

2016

 

 

Percentage
Change 2018
Versus 2017

 

 

Percentage
Change 2017
Versus 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

35,058

 

 

$

29,025

 

 

$

26,078

 

 

 

21%

 

 

 

11%

 

Net charge related to the TCJA

 

 

0

 

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

Impairment and restructuring expenses

 

 

0

 

 

 

306

 

 

 

1,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating income

 

$

35,058

 

 

$

29,331

 

 

$

27,188

 

 

 

20%

 

 

 

8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,571

 

 

$

25,489

 

 

$

20,539

 

 

 

(35)%

 

 

 

24%

 

Net charge related to the TCJA

 

 

13,696

 

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

Impairment and restructuring expenses

 

 

0

 

 

 

243

 

 

 

895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income

 

$

30,267

 

 

$

25,732

 

 

$

21,434

 

 

 

18%

 

 

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

2.13

 

 

$

3.25

 

 

$

2.56

 

 

 

(34)%

 

 

 

27%

 

Net charge related to the TCJA

 

 

1.75

 

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

Impairment and restructuring expenses

 

 

0

 

 

 

0.04

 

 

 

0.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted diluted earnings per share

 

$

3.88

 

 

$

3.29

 

 

$

2.67

 

 

 

18%

 

 

 

23%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

Three Months Ending,

 

 

 

 

 

 

September 30, 2018

 

$

11,081

 

December 31, 2018

 

 

8,688

 

March 31, 2019

 

 

5,995

 

June 30, 2019

 

 

3,141

 

Thereafter

 

 

3,815

 

 

 

 

 

Total

 

$

32,720

 

 

 

 

 

 

(In millions)

 

2019

 

 

2020-2021

 

 

2022-2023

 

 

Thereafter

 

 

Total

 

 

 

 

 

 

 

 

 

 

Long-term debt: (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments

 

$

4,000

 

 

$

9,268

 

 

$

10,794

 

 

$

52,836

 

 

$

76,898

 

Interest payments

 

 

2,377

 

 

 

4,495

 

 

 

4,066

 

 

 

31,247

 

 

 

42,185

 

Construction commitments (b)

 

 

1,793

 

 

 

107

 

 

 

0

 

 

 

0

 

 

 

1,900

 

Operating leases, including imputed interest (c)

 

 

1,538

 

 

 

2,567

 

 

 

1,778

 

 

 

2,416

 

 

 

8,299

 

Finance leases, including imputed interest (c)

 

 

470

 

 

 

1,101

 

 

 

1,142

 

 

 

5,751

 

 

 

8,464

 

Transition tax (d)

 

 

1,495

 

 

 

2,808

 

 

 

2,808

 

 

 

10,530

 

 

 

17,641

 

Purchase commitments (e)

 

 

19,321

 

 

 

874

 

 

 

255

 

 

 

408

 

 

 

20,858

 

Other long-term liabilities (f)

 

 

0

 

 

 

76

 

 

 

19

 

 

 

313

 

 

 

408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contractual obligations

 

$

30,994

 

 

$

21,296

 

 

$

20,862

 

 

$

103,501

 

 

$

176,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Refer to Note 12 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

(b)

Refer to Note 8 – Property and Equipment of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

(c)

Refer to Note 16 – Leases of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

(d)

Refer to Note 13 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

(e)

Amounts represent purchase commitments, including open purchase orders and take-or-pay contracts that are not presented as construction commitments above.

(f)

We have excluded long-term tax contingencies, other tax liabilities, and deferred income taxes of $13.6 billion from the amounts presented as the timing of these obligations is uncertain. We have also excluded unearned revenue and non-cash items.

Satya Nadella

Chief Executive Officer

 

Amy E. Hood

Executive Vice President and Chief Financial Officer

 

Frank H. Brod

Corporate Vice President, Finance and Administration;
Chief Accounting Officer

(In millions)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Categories

 

Hypothetical Change

 

June 30,

2018

 

 

June 30,

2017

 

 

Impact

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency - Revenue

 

10% decrease in foreign exchange rates

 

$

  (2,187

) 

 

$

  (1,785

) 

 

Earnings

 

Foreign currency - Investments

 

10% decrease in foreign exchange rates

 

 

(70

) 

 

 

(92

) 

 

Fair Value

 

Interest rate

 

100 basis point increase in U.S. treasury interest rates

 

 

(2,705

) 

 

 

(2,394

) 

 

Fair Value

 

Credit

 

100 basis point increase in credit spreads

 

 

(232

) 

 

 

(167

) 

 

Fair Value

 

Equity

 

10% decrease in equity market prices

 

 

(140

) 

 

 

(323

) 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

  64,497

 

 

$

63,811

 

 

$

67,336

 

Service and other

 

 

45,863

 

 

 

32,760

 

 

 

23,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

110,360

 

 

 

96,571

 

 

 

91,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

15,420

 

 

 

15,175

 

 

 

17,880

 

Service and other

 

 

22,933

 

 

 

19,086

 

 

 

14,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

 

 

38,353

 

 

 

34,261

 

 

 

32,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

72,007

 

 

 

62,310

 

 

 

58,374

 

Research and development

 

 

14,726

 

 

 

13,037

 

 

 

11,988

 

Sales and marketing

 

 

17,469

 

 

 

15,461

 

 

 

14,635

 

General and administrative

 

 

4,754

 

 

 

4,481

 

 

 

4,563

 

Impairment and restructuring

 

 

0

 

 

 

306

 

 

 

1,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

35,058

 

 

 

29,025

 

 

 

26,078

 

Other income (expense), net

 

 

1,416

 

 

 

876

 

 

 

(439

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

36,474

 

 

 

29,901

 

 

 

25,639

 

Provision for income taxes

 

 

19,903

 

 

 

4,412

 

 

 

5,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,571

 

 

$

25,489

 

 

$

20,539

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.15

 

 

$

3.29

 

 

$

2.59

 

Diluted

 

$

2.13

 

 

$

3.25

 

 

$

2.56

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,700

 

 

 

7,746

 

 

 

7,925

 

Diluted

 

 

7,794

 

 

 

7,832

 

 

 

8,013

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

1.68

 

 

$

1.56

 

 

$

1.44

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Net income

 

$

16,571

 

 

$

25,489

 

 

$

  20,539

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives

 

 

39

 

 

 

(218

)

 

 

(238

)

Net change related to investments

 

 

(2,717

)

 

 

(1,116

)

 

 

(228

)

Translation adjustments and other

 

 

(178

)

 

 

167

 

 

 

(262

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

(2,856

) 

 

 

(1,167

) 

 

 

(728

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

13,715

 

 

$

24,322

 

 

$

  19,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

2018

 

 

2017

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,946

 

 

$

7,663

 

Short-term investments

 

 

121,822

 

 

 

125,318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

 

133,768

 

 

 

132,981

 

Accounts receivable, net of allowance for doubtful accounts of $377 and $345

 

 

26,481

 

 

 

22,431

 

Inventories

 

 

2,662

 

 

 

2,181

 

Other

 

 

6,751

 

 

 

5,103

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

169,662

 

 

 

162,696

 

Property and equipment, net of accumulated depreciation of $29,223 and $24,179

 

 

29,460

 

 

 

23,734

 

Operating lease right-of-use assets

 

 

6,686

 

 

 

6,555

 

Equity and other investments

 

 

1,862

 

 

 

6,023

 

Goodwill

 

 

35,683

 

 

 

35,122

 

Intangible assets, net

 

 

8,053

 

 

 

10,106

 

Other long-term assets

 

 

7,442

 

 

 

6,076

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

258,848

 

 

$

250,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,617

 

 

$

7,390

 

Short-term debt

 

 

0

 

 

 

9,072

 

Current portion of long-term debt

 

 

3,998

 

 

 

1,049

 

Accrued compensation

 

 

6,103

 

 

 

5,819

 

Short-term income taxes

 

 

2,121

 

 

 

718

 

Short-term unearned revenue

 

 

28,905

 

 

 

24,013

 

Other

 

 

8,744

 

 

 

7,684

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

58,488

 

 

 

55,745

 

Long-term debt

 

 

72,242

 

 

 

76,073

 

Long-term income taxes

 

 

30,265

 

 

 

13,485

 

Long-term unearned revenue

 

 

3,815

 

 

 

2,643

 

Deferred income taxes

 

 

541

 

 

 

5,734

 

Operating lease liabilities

 

 

5,568

 

 

 

5,372

 

Other long-term liabilities

 

 

5,211

 

 

 

3,549

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

176,130

 

 

 

162,601

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000; outstanding 7,677 and 7,708

 

 

71,223

 

 

 

69,315

 

Retained earnings

 

 

13,682

 

 

 

17,769

 

Accumulated other comprehensive income (loss)

 

 

(2,187

)

 

 

627

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

82,718

 

 

 

87,711

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

258,848

 

 

$

250,312

 

 

 

 

 

 

 

 

 

 

 (In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,571

 

 

$

25,489

 

 

$

20,539

 

Adjustments to reconcile net income to net cash from operations:

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairments

 

 

0

 

 

 

0

 

 

 

630

 

Depreciation, amortization, and other

 

 

10,261

 

 

 

8,778

 

 

 

6,622

 

Stock-based compensation expense

 

 

3,940

 

 

 

3,266

 

 

 

2,668

 

Net recognized gains on investments and derivatives

 

 

(2,212

)

 

 

(2,073

)

 

 

(223

)

Deferred income taxes

 

 

(5,143

)

 

 

(829

)

 

 

2,479

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,862

)

 

 

(1,216

)

 

 

562

 

Inventories

 

 

(465

)

 

 

50

 

 

 

600

 

Other current assets

 

 

(952

)

 

 

1,028

 

 

 

(1,212

)

Other long-term assets

 

 

(285

)

 

 

(917

)

 

 

(1,110

)

Accounts payable

 

 

1,148

 

 

 

81

 

 

 

88

 

Unearned revenue

 

 

5,922

 

 

 

3,820

 

 

 

2,565

 

Income taxes

 

 

18,183

 

 

 

1,792

 

 

 

(298

)

Other current liabilities

 

 

798

 

 

 

356

 

 

 

(179

)

Other long-term liabilities

 

 

(20

)

 

 

(118

)

 

 

(406

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

 

 

43,884

 

 

 

39,507

 

 

 

33,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance (repayments) of short-term debt, maturities of 90 days or less, net

 

 

(7,324

)

 

 

(4,963

)

 

 

7,195

 

Proceeds from issuance of debt

 

 

7,183

 

 

 

44,344

 

 

 

13,884

 

Repayments of debt

 

 

(10,060

)

 

 

(7,922

)

 

 

(2,796

)

Common stock issued

 

 

1,002

 

 

 

772

 

 

 

668

 

Common stock repurchased

 

 

(10,721

)

 

 

(11,788

)

 

 

(15,969

)

Common stock cash dividends paid

 

 

(12,699

)

 

 

(11,845

)

 

 

(11,006

)

Other, net

 

 

(971

)

 

 

(190

)

 

 

(369

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from (used in) financing

 

 

(33,590

)

 

 

8,408

 

 

 

(8,393

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(11,632

)

 

 

(8,129

)

 

 

(8,343

)

Acquisition of companies, net of cash acquired, and purchases of intangible and other assets

 

 

(888

)

 

 

(25,944

)

 

 

(1,393

)

Purchases of investments

 

 

(137,380

)

 

 

(176,905

)

 

 

(129,758

)

Maturities of investments

 

 

26,360

 

 

 

28,044

 

 

 

22,054

 

Sales of investments

 

 

117,577

 

 

 

136,350

 

 

 

93,287

 

Securities lending payable

 

 

(98

)

 

 

(197

)

 

 

203

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing

 

 

(6,061

)

 

 

  (46,781

)

 

 

  (23,950

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

 

 

50

 

 

 

19

 

 

 

(67

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

4,283

 

 

 

1,153

 

 

 

915

 

Cash and cash equivalents, beginning of period

 

 

7,663

 

 

 

6,510

 

 

 

5,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

11,946

 

 

$

7,663

 

 

$

6,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Common stock and paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

69,315

 

 

$

68,178

 

 

$

68,465

 

Common stock issued

 

 

1,002

 

 

 

772

 

 

 

668

 

Common stock repurchased

 

 

(3,033

)

 

 

(2,987

)

 

 

(3,689

)

Stock-based compensation expense

 

 

3,940

 

 

 

3,266

 

 

 

2,668

 

Other, net

 

 

(1

)

 

 

86

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

71,223

 

 

 

69,315

 

 

 

68,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

17,769

 

 

 

13,118

 

 

 

16,191

 

Net income

 

 

16,571

 

 

 

25,489

 

 

 

20,539

 

Common stock cash dividends

 

 

(12,917

)

 

 

(12,040

)

 

 

(11,329

)

Common stock repurchased

 

 

(7,699

)

 

 

(8,798

)

 

 

(12,283

)

Cumulative effect of accounting change

 

 

(42

)

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

13,682

 

 

 

17,769

 

 

 

13,118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

627

 

 

 

1,794

 

 

 

2,522

 

Other comprehensive loss

 

 

(2,856

) 

 

 

(1,167

) 

 

 

(728

)

Cumulative effect of accounting change

 

 

42

 

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

(2,187

) 

 

 

627

 

 

 

1,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

  82,718

 

 

$

  87,711

 

 

$

  83,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2018

 

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

361

 

 

 

$

409

 

 

$

289

 

Charged to costs and other

 

 

134

 

 

 

 

58

 

 

 

175

 

Write-offs

 

 

(98

) 

 

 

 

(106

)

 

 

(55

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

  397

 

 

 

$

  361

 

 

$

  409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

2018

 

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

$

377

 

 

 

$

345

 

 

$

392

 

Other long-term assets

 

 

20

 

 

 

 

16

 

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  397

 

 

 

$

  361

 

 

$

  409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 non-derivative investments primarily include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

 

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 non-derivative investments consist primarily of corporate notes and bonds, foreign government bonds, mortgage- and asset-backed securities, commercial paper, certificates of deposit, and U.S. agency securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

 

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 non-derivative assets and liabilities primarily comprise investments in common and preferred stock, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

(In millions)

 

As

Previously

Reported

 

 

As

Adjusted

 

 

 

 

 

Balance Sheets

 

 

 

 

 

 

June 30,

2017

 

 

 

 

 

 

 

 

 

 

Long-term income taxes

 

$

0

 

 

$

13,485

 

Other long-term liabilities

 

 

17,034

 

 

 

3,549

 

 

 

 

 

 

 

 

 

 

(In millions, except per share amounts)

 

As

Previously

Reported

 

 

New

Revenue

Standard

Adjustment

 

 

As

Restated

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Income Statements

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Year Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

89,950

 

 

$

6,621

 

 

$

96,571

 

Provision for income taxes

 

 

1,945

 

 

 

2,467

 

 

 

4,412

 

Net income

 

 

21,204

 

 

 

4,285

 

 

 

25,489

 

Diluted earnings per share

 

 

2.71

 

 

 

0.54

 

 

 

3.25

 

  

 

Year Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

85,320

 

 

$

5,834

 

 

$

91,154

 

Provision for income taxes

 

 

2,953

 

 

 

2,147

 

 

 

5,100

 

Net income

 

 

16,798

 

 

 

3,741

 

 

 

20,539

 

Diluted earnings per share

 

 

2.10

 

 

 

0.46

 

 

 

2.56

 

 

 

(In millions)

 

As

Previously

Reported

 

 

New

Revenue

Standard

Adjustment

 

 

New Lease

Standard

Adjustment

 

 

As

Restated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

$

19,792

 

 

$

2,639

 

 

$

0

 

 

$

22,431

 

Operating lease right-of-use assets

 

 

0

 

 

 

0

 

 

 

6,555

 

 

 

6,555

 

Other current and long-term assets

 

 

11,147

 

 

 

32

 

 

 

0

 

 

 

11,179

 

Unearned revenue

 

 

44,479

 

 

 

(17,823

)

 

 

0

 

 

 

26,656

 

Deferred income taxes

 

 

531

 

 

 

5,203

 

 

 

0

 

 

 

5,734

 

Operating lease liabilities

 

 

0

 

 

 

0

 

 

 

5,372

 

 

 

5,372

 

Other current and long-term liabilities

 

 

23,464

 

 

 

(26

)

 

 

1,183

 

 

 

24,621

 

Stockholders' equity

 

 

72,394

 

 

 

15,317

 

 

 

0

 

 

 

87,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except earnings per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders (A)

 

$

  16,571

 

 

$

  25,489

 

 

$

  20,539

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock (B)

 

 

7,700

 

 

 

7,746

 

 

 

7,925

 

Dilutive effect of stock-based awards

 

 

94

 

 

 

86

 

 

 

88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents (C)

 

 

  7,794

 

 

 

  7,832

 

 

 

  8,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

2.15

 

 

$

3.29

 

 

$

2.59

 

Diluted (A/C)

 

$

2.13

 

 

$

3.25

 

 

$

2.56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Dividends and interest income

 

$

2,214

 

 

$

1,387

 

 

$

903

 

Interest expense

 

 

  (2,733

)

 

 

  (2,222

)

 

 

  (1,243

)

Net recognized gains on investments

 

 

2,399

 

 

 

2,583

 

 

 

668

 

Net losses on derivatives

 

 

(187

)

 

 

(510

)

 

 

(443

)

Net losses on foreign currency remeasurements

 

 

(218

)

 

 

(111

)

 

 

(129

)

Other, net

 

 

(59

)

 

 

(251

)

 

 

(195

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,416

 

 

$

876

 

 

$

  (439

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Other-than-temporary impairments of investments

 

$

(47

)

 

$

(55

)

 

$

(322

)

Realized gains from sales of available-for-sale securities

 

 

  3,478

 

 

 

  3,064

 

 

 

  1,376

 

Realized losses from sales of available-for-sale securities

 

 

(1,032

)

 

 

(426

)

 

 

(386

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  2,399

 

 

$

  2,583

 

 

$

  668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Recorded

Basis

 

 

Cash

and Cash

Equivalents

 

 

Short-term

Investments

 

 

Equity

and Other

Investments

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

3,942

 

 

$

0

 

 

$

0

 

 

$

3,942

 

 

$

3,942

 

 

$

0

 

 

$

0

 

Mutual funds

 

 

246

 

 

 

0

 

 

 

0

 

 

 

246

 

 

 

246

 

 

 

0

 

 

 

0

 

Commercial paper

 

 

2,513

 

 

 

0

 

 

 

0

 

 

 

2,513

 

 

 

2,215

 

 

 

298

 

 

 

0

 

Certificates of deposit

 

 

2,058

 

 

 

0

 

 

 

0

 

 

 

2,058

 

 

 

1,865

 

 

 

193

 

 

 

0

 

U.S. government and agency securities

 

 

109,862

 

 

 

62

 

 

 

(1,167

)

 

 

108,757

 

 

 

3,678

 

 

 

105,079

 

 

 

0

 

Foreign government bonds

 

 

5,182

 

 

 

1

 

 

 

(10

)

 

 

5,173

 

 

 

0

 

 

 

5,173

 

 

 

0

 

Mortgage- and asset-backed securities

 

 

3,868

 

 

 

4

 

 

 

(13

)

 

 

3,859

 

 

 

0

 

 

 

3,859

 

 

 

0

 

Corporate notes and bonds

 

 

6,947

 

 

 

21

 

 

 

(56

)

 

 

6,912

 

 

 

0

 

 

 

6,912

 

 

 

0

 

Municipal securities

 

 

271

 

 

 

37

 

 

 

(1

)

 

 

307

 

 

 

0

 

 

 

307

 

 

 

0

 

Common and preferred stock

 

 

1,220

 

 

 

95

 

 

 

(10

)

 

 

1,305

 

 

 

0

 

 

 

0

 

 

 

1,305

 

Other investments

 

 

558

 

 

 

0

 

 

 

0

 

 

 

558

 

 

 

0

 

 

 

1

 

 

 

557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

136,667

 

 

$

  220

 

 

$

 (1,257

)

 

$

135,630

 

 

$

  11,946

 

 

$

121,822

 

 

$

  1,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Recorded

Basis

 

 

Cash

and Cash

Equivalents

 

 

Short-term

Investments

 

 

Equity

and Other

Investments

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

3,624

 

 

$

0

 

 

$

0

 

 

$

3,624

 

 

$

3,624

 

 

$

0

 

 

$

0

 

Mutual funds

 

 

1,478

 

 

 

0

 

 

 

0

 

 

 

1,478

 

 

 

1,478

 

 

 

0

 

 

 

0

 

Commercial paper

 

 

319

 

 

 

0

 

 

 

0

 

 

 

319

 

 

 

69

 

 

 

250

 

 

 

0

 

Certificates of deposit

 

 

1,358

 

 

 

0

 

 

 

0

 

 

 

1,358

 

 

 

972

 

 

 

386

 

 

 

0

 

U.S. government and agency securities

 

 

112,119

 

 

 

85

 

 

 

(360

)

 

 

111,844

 

 

 

16

 

 

 

111,828

 

 

 

0

 

Foreign government bonds

 

 

5,276

 

 

 

2

 

 

 

(13

)

 

 

5,265

 

 

 

1,504

 

 

 

3,761

 

 

 

0

 

Mortgage- and asset-backed securities

 

 

3,921

 

 

 

14

 

 

 

(4

)

 

 

3,931

 

 

 

0

 

 

 

3,931

 

 

 

0

 

Corporate notes and bonds

 

 

4,786

 

 

 

61

 

 

 

(12

)

 

 

4,835

 

 

 

0

 

 

 

4,835

 

 

 

0

 

Municipal securities

 

 

284

 

 

 

43

 

 

 

0

 

 

 

327

 

 

 

0

 

 

 

327

 

 

 

0

 

Common and preferred stock

 

 

2,472

 

 

 

3,062

 

 

 

(34

)

 

 

5,500

 

 

 

0

 

 

 

0

 

 

 

5,500

 

Other investments

 

 

523

 

 

 

0

 

 

 

0

 

 

 

523

 

 

 

0

 

 

 

0

 

 

 

523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

136,160

 

 

$

  3,267

 

 

$

  (423

)

 

$

139,004

 

 

$

  7,663

 

 

$

125,318

 

 

$

  6,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

 

 

 

Total
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Total
Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

82,352

 

 

$

(1,064

)

 

$

4,459

 

 

$

(103

)

 

$

86,811

 

 

$

(1,167

)

Foreign government bonds

 

 

3,457

 

 

 

(7

)

 

 

13

 

 

 

(3

)

 

 

3,470

 

 

 

(10

)

Mortgage- and asset-backed securities

 

 

2,072

 

 

 

(9

)

 

 

96

 

 

 

(4

)

 

 

2,168

 

 

 

(13

)

Corporate notes and bonds

 

 

3,111

 

 

 

(43

)

 

 

301

 

 

 

(13

)

 

 

3,412

 

 

 

(56

)

Municipal securities

 

 

45

 

 

 

(1

)

 

 

0

 

 

 

0

 

 

 

45

 

 

 

(1

)

Common and preferred stock

 

 

75

 

 

 

(6

)

 

 

8

 

 

 

(4

)

 

 

83

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

91,112

 

 

$

(1,130

)

 

$

4,877

 

 

$

  (127

)

 

$

95,989

 

 

$

(1,257

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

 

 

 

Total
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Total
Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

87,558

 

 

$

(348

)

 

$

371

 

 

$

(12

)

 

$

87,929

 

 

$

(360

)

Foreign government bonds

 

 

4,006

 

 

 

(2

)

 

 

23

 

 

 

(11

)

 

 

4,029

 

 

 

(13

)

Mortgage- and asset-backed securities

 

 

1,068

 

 

 

(3

)

 

 

198

 

 

 

(1

)

 

 

1,266

 

 

 

(4

)

Corporate notes and bonds

 

 

669

 

 

 

(8

)

 

 

177

 

 

 

(4

)

 

 

846

 

 

 

(12

)

Common and preferred stock

 

 

69

 

 

 

(6

)

 

 

148

 

 

 

(28

)

 

 

217

 

 

 

(34

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  93,370

 

 

$

  (367

)

 

$

  917

 

 

$

  (56

)

 

$

  94,287

 

 

$

  (423

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Cost Basis

 

 

Estimated

Fair Value

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

31,590

 

 

$

31,451

 

Due after one year through five years

 

 

76,422

 

 

 

75,810

 

Due after five years through 10 years

 

 

21,765

 

 

 

21,396

 

Due after 10 years

 

 

924

 

 

 

922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  130,701

 

 

$

  129,579

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Short-term
Investments

 

Other
Current
Assets

 

Equity and
Other
Investments

 

Other

Long-term Assets

 

Other
Current
Liabilities

 

Other

Long-term Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-designated Hedge Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

10

 

 

$

221

 

 

$

0

 

 

$

25

 

 

$

(193

)

 

$

(4

)

Equity contracts

 

 

2

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(7

)

 

 

0

 

Interest rate contracts

 

 

11

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(2

)

 

 

0

 

Credit contracts

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(1

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

23

 

 

$

221

 

 

$

0

 

 

$

25

 

 

$

(203

)

 

$

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated Hedge Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

95

 

 

$

174

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

Equity contracts

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

95

 

 

$

174

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross amounts of derivatives

 

$

118

 

 

$

395

 

 

$

0

 

 

$

25

 

 

$

(203

)

 

$

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross derivatives either offset or subject to an enforceable master netting agreement

 

$

113

 

 

$

395

 

 

$

0

 

 

$

25

 

 

$

(203

)

 

$

  (4

)

Gross amounts of derivatives offset on the balance sheet

 

 

  (14

)

 

 

(135

)

 

 

  0

 

 

 

(3

)

 

 

150

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amounts presented on the balance sheet

 

 

  99

 

 

 

260

 

 

 

0

 

 

 

22

 

 

 

(53

)

 

 

(1

)

Gross amounts of derivatives not offset on the balance sheet

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Cash collateral received

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(235

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amount

 

$

  99

 

 

$

260

 

 

$

0

 

 

$

22

 

 

$

  (288

)

 

$

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Short-term
Investments

 

Other
Current
Assets

 

Equity and
Other
Investments

 

Other

Long-term Assets

 

Other
Current
Liabilities

 

Other

Long-term Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-designated Hedge Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

9

 

 

$

203

 

 

$

0

 

 

$

6

 

 

$

(134

)

 

$

(8

)

Equity contracts

 

 

3

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(6

)

 

 

0

 

Interest rate contracts

 

 

3

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(7

)

 

 

0

 

Credit contracts

 

 

5

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(1

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

20

 

 

$

203

 

 

$

0

 

 

$

6

 

 

$

(148

)

 

$

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated Hedge Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

80

 

 

$

133

 

 

$

0

 

 

$

0

 

 

$

(3

)

 

$

0

 

Equity contracts

 

 

0

 

 

 

0

 

 

 

67

 

 

 

0

 

 

 

(186

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

80

 

 

$

133

 

 

$

67

 

 

$

0

 

 

$

(189

)

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross amounts of derivatives

 

$

100

 

 

$

336

 

 

$

67

 

 

$

6

 

 

$

(337

)

 

$

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross derivatives either offset or subject to an enforceable master netting agreement

 

$

100

 

 

$

336

 

 

$

67

 

 

$

6

 

 

$

(334

)

 

$

  (8

)

Gross amounts of derivatives offset on the balance sheet

 

 

  (20

)

 

 

  (132

)

 

 

  (67

)

 

 

  (8

)

 

 

221

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amounts presented on the balance sheet

 

 

80

 

 

 

204

 

 

 

0

 

 

 

  (2

)

 

 

(113

)

 

 

(1

)

Gross amounts of derivatives not offset on the balance sheet

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Cash collateral received

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(228

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amount

 

$

80

 

 

$

204

 

 

$

0

 

 

$

  (2

)

 

$

  (341

)

 

$

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Foreign Exchange Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

  25

 

 

$

  441

 

 

$

  (797

)

Hedged items

 

 

  78

 

 

 

  (386

)

 

 

  838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amount of ineffectiveness

 

$

103

 

 

$

55

 

 

$

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

(324

)

 

$

(74

)

 

$

(76

)

Hedged items

 

 

324

 

 

 

74

 

 

 

76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amount of ineffectiveness

 

$

0

 

 

$

0

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of equity contracts excluded from effectiveness assessment

 

$

  80

 

 

$

  (80

)

 

$

  (10

)

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Effective Portion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains recognized in other comprehensive income (net of tax of $11, $4, and $24)

 

$

219

 

 

$

328

 

 

$

351

 

Gains reclassified from accumulated other comprehensive income (loss) into revenue

 

 

185

 

 

 

555

 

 

 

625

 

 

 

 

 

Amount Excluded from Effectiveness Assessment and Ineffective Portion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses recognized in other income (expense), net

 

 

  (255

)

 

 

  (389

)

 

 

  (354

)

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Foreign exchange contracts

 

$

(33

)

 

$

(117

)

 

$

(55

)

Equity contracts

 

 

(87

)

 

 

(114

)

 

 

(21

)

Interest rate contracts

 

 

(15

)

 

 

14

 

 

 

10

 

Credit contracts

 

 

(2

)

 

 

5

 

 

 

(1

)

Other contracts

 

 

0

 

 

 

(22

)

 

 

(87

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  (137

)

 

$

  (234

)

 

$

  (154

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

Level 1

 

 

 

Level 2

 

 

 

Level 3

 

 

 

Gross Fair

Value

 

 

 

Netting

(a)

 

 

Net Fair
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

$

246

 

 

$

0

 

 

$

0

 

 

$

246

 

 

$

0

 

 

$

246

 

Commercial paper

 

 

0

 

 

 

2,513

 

 

 

0

 

 

 

2,513

 

 

 

0

 

 

 

2,513

 

Certificates of deposit

 

 

0

 

 

 

2,058

 

 

 

0

 

 

 

2,058

 

 

 

0

 

 

 

2,058

 

U.S. government and agency securities

 

 

107,015

 

 

 

1,742

 

 

 

0

 

 

 

108,757

 

 

 

0

 

 

 

108,757

 

Foreign government bonds

 

 

22

 

 

 

5,054

 

 

 

0

 

 

 

5,076

 

 

 

0

 

 

 

5,076

 

Mortgage- and asset-backed securities

 

 

0

 

 

 

3,855

 

 

 

0

 

 

 

3,855

 

 

 

0

 

 

 

3,855

 

Corporate notes and bonds

 

 

0

 

 

 

6,894

 

 

 

15

 

 

 

6,909

 

 

 

0

 

 

 

6,909

 

Municipal securities

 

 

0

 

 

 

307

 

 

 

0

 

 

 

307

 

 

 

0

 

 

 

307

 

Common and preferred stock

 

 

287

 

 

 

0

 

 

 

18

 

 

 

305

 

 

 

0

 

 

 

305

 

Derivatives

 

 

1

 

 

 

535

 

 

 

2

 

 

 

538

 

 

 

(152

)

 

 

386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 107,571

 

 

$

  22,958

 

 

$

35

 

 

$

 130,564

 

 

$

  (152

)

 

$

130,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives and other

 

$

1

 

 

$

206

 

 

$

0

 

 

$

207

 

 

$

(153

)

 

$

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

Level 1

 

 

 

Level 2

 

 

 

Level 3

 

 

 

Gross Fair

Value

 

 

 

Netting

(a)

 

 

Net Fair
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

$

1,478

 

 

$

0

 

 

$

0

 

 

$

1,478

 

 

$

0

 

 

$

1,478

 

Commercial paper

 

 

0

 

 

 

319

 

 

 

0

 

 

 

319

 

 

 

0

 

 

 

319

 

Certificates of deposit

 

 

0

 

 

 

1,358

 

 

 

0

 

 

 

1,358

 

 

 

0

 

 

 

1,358

 

U.S. government and agency securities

 

 

109,228

 

 

 

2,616

 

 

 

0

 

 

 

111,844

 

 

 

0

 

 

 

111,844

 

Foreign government bonds

 

 

0

 

 

 

5,187

 

 

 

0

 

 

 

5,187

 

 

 

0

 

 

 

5,187

 

Mortgage- and asset-backed securities

 

 

0

 

 

 

3,934

 

 

 

0

 

 

 

3,934

 

 

 

0

 

 

 

3,934

 

Corporate notes and bonds

 

 

0

 

 

 

4,829

 

 

 

1

 

 

 

4,830

 

 

 

0

 

 

 

4,830

 

Municipal securities

 

 

0

 

 

 

327

 

 

 

0

 

 

 

327

 

 

 

0

 

 

 

327

 

Common and preferred stock

 

 

2,414

 

 

 

1,994

 

 

 

18

 

 

 

4,426

 

 

 

0

 

 

 

4,426

 

Derivatives

 

 

1

 

 

 

508

 

 

 

0

 

 

 

509

 

 

 

(227

)

 

 

282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  113,121

 

 

$

  21,072

 

 

$

19

 

 

$

  134,212

 

 

$

  (227

)

 

$

  133,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives and other

 

$

0

 

 

$

345

 

 

$

39

 

 

$

384

 

 

$

(228

)

 

$

156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk.

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

2018

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

Net fair value of assets measured at fair value on a recurring basis

 

$

130,412

 

 

$

133,985

 

Cash

 

 

3,942

 

 

 

3,624

 

Common and preferred stock measured at fair value on a nonrecurring basis

 

 

999

 

 

 

1,073

 

Other investments measured at fair value on a nonrecurring basis

 

 

557

 

 

 

523

 

Less derivative net assets classified as other current and long-term assets

 

 

(282

)

 

 

(202

)

Other

 

 

2

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded basis of investment components

 

$

  135,630

 

 

$

  139,004

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

June 30,

 

2018

 

 

2017

 

 

 

 

Raw materials

 

$

655

 

 

$

797

 

Work in process

 

 

54

 

 

 

145

 

Finished goods

 

 

1,953

 

 

 

1,239

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  2,662

 

 

$

  2,181

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

June 30,

 

2018

 

 

2017

 

 

 

 

Land

 

$

1,254

 

 

$

1,107

 

Buildings and improvements

 

 

20,604

 

 

 

16,284

 

Leasehold improvements

 

 

4,735

 

 

 

5,064

 

Computer equipment and software

 

 

27,633

 

 

 

21,414

 

Furniture and equipment

 

 

4,457

 

 

 

4,044

 

 

 

 

 

 

 

 

 

 

 

 

 

Total, at cost

 

 

58,683

 

 

 

47,913

 

Accumulated depreciation

 

 

(29,223

)

 

 

(24,179

)

 

 

 

 

 

 

 

 

 

 

 

 

Total, net

 

$

  29,460

 

 

$

  23,734

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,328

 

Short-term investments

 

 

2,110

 

Other current assets

 

 

697

 

Property and equipment

 

 

1,529

 

Intangible assets

 

 

7,887

 

Goodwill (a)

 

 

16,803

 

Short-term debt (b)

 

 

(1,323

)

Other current liabilities

 

 

(1,117

)

Deferred income taxes

 

 

(774

)

Other

 

 

(131

)

 

 

 

 

 

 

 

 

 

 

Total purchase price

 

$

  27,009

 

 

 

 

 

 

(a)

Goodwill was assigned to our Productivity and Business Processes segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of LinkedIn. None of the goodwill is expected to be deductible for income tax purposes.

(b)

Convertible senior notes issued by LinkedIn on November 12, 2014, substantially all of which were redeemed after our acquisition of LinkedIn. The remaining $18 million of notes are not redeemable and are included in long-term debt in our consolidated balance sheets. Refer to Note 12 – Debt for further information.

(In millions)

 

Amount

 

 

Weighted

Average Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer-related

 

$

  3,607

 

 

 

7 years

 

Marketing-related (trade names)

 

 

2,148

 

 

 

20 years

 

Technology-based

 

 

2,109

 

 

 

3 years

 

Contract-based

 

 

23

 

 

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of intangible assets acquired

 

$

7,887

 

 

 

9 years

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

 

2017

 

 

 

 

 

 

 

Revenue

 

 

$

  2,271

 

Operating loss

 

 

 

(924

)

 

 

 

 

 

(In millions, except earnings per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

  98,291

 

 

$

  94,490

 

Net income

 

 

25,179

 

 

 

19,128

 

Diluted earnings per share

 

 

3.21

 

 

 

2.38

 

 

 

 

 

 

 

 

 

 

(In millions)

 

June 30,

2016

 

Acquisitions

 

Other

 

June 30,

2017

 

Acquisitions

 

Other

 

June 30,
2018

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

 

$

6,678

 

 

$

17,072

(a)

 

$

(11

)

 

$

23,739

 

 

$

72

 

 

$

12

 

 

$

23,823

 

Intelligent Cloud

 

 

 

5,467

 

 

 

49

 

 

 

39

 

 

 

5,555

 

 

 

164

 

 

 

(16

)

 

 

5,703

 

More Personal Computing

 

 

 

5,727

 

 

 

115

 

 

 

(14

)

 

 

5,828

 

 

 

394

 

 

 

(65

)

 

 

6,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

  17,872

 

 

$

  17,236

 

 

$

  14

 

 

$

  35,122

 

 

$

  630

 

 

$

  (69

)

 

$

  35,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes goodwill related to LinkedIn and other acquisitions. Refer to Note 9 – Business Combinations for further information.

(In millions)

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Carrying
Amount

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Carrying
Amount

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

Technology-based

 

$

7,220

 

 

$

(5,018

)

 

$

2,202

 

 

$

7,765

 

 

$

(4,318

)

 

$

3,447

 

Customer-related

 

 

4,031

 

 

 

(1,205

)

 

 

2,826

 

 

 

4,045

 

 

 

(692

)

 

 

3,353

 

Marketing-related

 

 

4,006

 

 

 

(1,071

)

 

 

2,935

 

 

 

4,016

 

 

 

(829

)

 

 

3,187

 

Contract-based

 

 

679

 

 

 

(589

)

 

 

90

 

 

 

841

 

 

 

(722

)

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  15,936

 

 

$

  (7,883

)

 

$

  8,053

 

 

$

  16,667

 

 

$

  (6,561

)

 

$

  10,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Amount

 

 

Weighted

Average Life

 

 

Amount

 

 

Weighted

Average Life

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

Technology-based

 

$

178

 

 

 

4 years

 

 

$

2,265

 

 

 

2 years

 

Marketing-related

 

 

14

 

 

 

5 years

 

 

 

2,148

 

 

 

19 years

 

Contract-based

 

 

14

 

 

 

4 years

 

 

 

63

 

 

 

6 years

 

Customer-related

 

 

13

 

 

 

5 years

 

 

 

3,607

 

 

 

7 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  219

 

 

 

5 years

 

 

$

  8,083

 

 

 

9 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

2019

 

$

1,785

 

2020

 

 

1,260

 

2021

 

 

1,043

 

2022

 

 

949

 

2023

 

 

806

 

Thereafter

 

 

2,210

 

 

 

 

 

 

 

 

Total

 

$

  8,053

 

 

 

 

 

 

(In millions, except interest rates)

 

Face Value June 30,

2018

 

 

Face Value June 30,

2017

 

 

 

Stated

Interest

Rate

 

 

 

Effective

Interest

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 15, 2017

 

$

0

 

 

$

600

 

 

 

0.875%

 

 

 

1.084%

 

May 1, 2018

 

 

0

 

 

 

450

 

 

 

1.000%

 

 

 

1.106%

 

November 3, 2018

 

 

1,750

 

 

 

1,750

 

 

 

1.300%

 

 

 

1.396%

 

December 6, 2018

 

 

1,250

 

 

 

1,250

 

 

 

1.625%

 

 

 

1.824%

 

June 1, 2019

 

 

1,000

 

 

 

1,000

 

 

 

4.200%

 

 

 

4.379%

 

August 8, 2019

 

 

2,500

 

 

 

2,500

 

 

 

1.100%

 

 

 

1.203%

 

November 1, 2019

 

 

18

 

 

 

18

 

 

 

0.500%

 

 

 

0.500%

 

February 6, 2020

 

 

1,500

 

 

 

1,500

 

 

 

1.850%

 

 

 

1.952%

 

February 12, 2020

 

 

1,500

 

 

 

1,500

 

 

 

1.850%

 

 

 

1.935%

 

October 1, 2020

 

 

1,000

 

 

 

1,000

 

 

 

3.000%

 

 

 

3.137%

 

November 3, 2020

 

 

2,250

 

 

 

2,250

 

 

 

2.000%

 

 

 

2.093%

 

February 8, 2021

 

 

500

 

 

 

500

 

 

 

4.000%

 

 

 

4.082%

 

August 8, 2021

 

 

2,750

 

 

 

2,750

 

 

 

1.550%

 

 

 

1.642%

 

December 6, 2021 (a)

 

 

2,044

 

 

 

1,996

 

 

 

2.125%

 

 

 

2.233%

 

February 6, 2022

 

 

1,750

 

 

 

1,750

 

 

 

2.400%

 

 

 

2.520%

 

February 12, 2022

 

 

1,500

 

 

 

1,500

 

 

 

2.375%

 

 

 

2.466%

 

November 3, 2022

 

 

1,000

 

 

 

1,000

 

 

 

2.650%

 

 

 

2.717%

 

November 15, 2022

 

 

750

 

 

 

750

 

 

 

2.125%

 

 

 

2.239%

 

May 1, 2023

 

 

1,000

 

 

 

1,000

 

 

 

2.375%

 

 

 

2.465%

 

August 8, 2023

 

 

1,500

 

 

 

1,500

 

 

 

2.000%

 

 

 

2.101%

 

December 15, 2023

 

 

1,500

 

 

 

1,500

 

 

 

3.625%

 

 

 

3.726%

 

February 6, 2024

 

 

2,250

 

 

 

2,250

 

 

 

2.875%

 

 

 

3.041%

 

February 12, 2025

 

 

2,250

 

 

 

2,250

 

 

 

2.700%

 

 

 

2.772%

 

November 3, 2025

 

 

3,000

 

 

 

3,000

 

 

 

3.125%

 

 

 

3.176%

 

August 8, 2026

 

 

4,000

 

 

 

4,000

 

 

 

2.400%

 

 

 

 2.464%

 

February 6, 2027

 

 

4,000

 

 

 

4,000

 

 

 

3.300%

 

 

 

3.383%

 

December 6, 2028 (a)

 

 

2,044

 

 

 

1,996

 

 

 

3.125%

 

 

 

3.218%

 

May 2, 2033 (a)

 

 

642

 

 

 

627

 

 

 

2.625%

 

 

 

2.690%

 

February 12, 2035

 

 

1,500

 

 

 

1,500

 

 

 

3.500%

 

 

 

3.604%

 

November 3, 2035

 

 

1,000

 

 

 

1,000

 

 

 

4.200%

 

 

 

4.260%

 

August 8, 2036

 

 

2,250

 

 

 

2,250

 

 

 

3.450%

 

 

 

 3.510%

 

February 6, 2037

 

 

2,500

 

 

 

2,500

 

 

 

4.100%

 

 

 

4.152%

 

June 1, 2039

 

 

750

 

 

 

750

 

 

 

5.200%

 

 

 

5.240%

 

October 1, 2040

 

 

1,000

 

 

 

1,000

 

 

 

4.500%

 

 

 

4.567%

 

February 8, 2041

 

 

1,000

 

 

 

1,000

 

 

 

5.300%

 

 

 

5.361%

 

November 15, 2042

 

 

900

 

 

 

900

 

 

 

3.500%

 

 

 

3.571%

 

May 1, 2043

 

 

500

 

 

 

500

 

 

 

3.750%

 

 

 

3.829%

 

December 15, 2043

 

 

500

 

 

 

500

 

 

 

4.875%

 

 

 

4.918%

 

February 12, 2045

 

 

1,750

 

 

 

1,750

 

 

 

3.750%

 

 

 

3.800%

 

November 3, 2045

 

 

3,000

 

 

 

3,000

 

 

 

4.450%

 

 

 

4.492%

 

August 8, 2046

 

 

4,500

 

 

 

4,500

 

 

 

3.700%

 

 

 

3.743%

 

February 6, 2047

 

 

3,000

 

 

 

3,000

 

 

 

4.250%

 

 

 

4.287%

 

February 12, 2055

 

 

2,250

 

 

 

2,250

 

 

 

4.000%

 

 

 

4.063%

 

November 3, 2055

 

 

1,000

 

 

 

1,000

 

 

 

4.750%

 

 

 

4.782%

 

August 8, 2056

 

 

2,250

 

 

 

2,250

 

 

 

3.950%

 

 

 

 4.033%

 

February 6, 2057

 

 

2,000

 

 

 

2,000

 

 

 

4.500%

 

 

 

4.528%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  76,898

 

 

$

  77,837

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Euro-denominated debt securities.

(In millions)

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

2019

 

$

4,000

 

2020

 

 

5,518

 

2021

 

 

3,750

 

2022

 

 

8,044

 

2023

 

 

2,750

 

Thereafter

 

 

52,836

 

 

 

 

 

Total

 

$

  76,898

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Current Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

19,764

 

 

$

2,739

 

 

$

545

 

U.S. state and local

 

 

934

 

 

 

30

 

 

 

136

 

Foreign

 

 

4,348

 

 

 

2,472

 

 

 

1,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current taxes

 

$

25,046

 

 

$

5,241

 

 

$

2,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

(4,292

)

 

$

(554

)

 

$

1,919

 

U.S. state and local

 

 

(458

)

 

 

269

 

 

 

111

 

Foreign

 

 

(393

)

 

 

(544

)

 

 

449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes

 

$

(5,143

)

 

$

(829

)

 

$

2,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

  19,903

 

 

$

  4,412

 

 

$

  5,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

U.S.

 

$

11,527

 

 

$

6,843

 

 

$

5,125

 

Foreign

 

 

24,947

 

 

 

23,058

 

 

 

20,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

  36,474

 

 

$

  29,901

 

 

$

  25,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Federal statutory rate

 

 

28.1%

 

 

 

35.0%

 

 

 

35.0%

 

Effect of:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign earnings taxed at lower rates

 

 

(7.8)%

 

 

 

(11.6)%

 

 

 

(14.5)%

 

Impacts of TCJA

 

 

37.7%

 

 

 

0%

 

 

 

0%

 

Phone business losses

 

 

0%

 

 

 

(5.7)%

 

 

 

1.0%

 

Excess tax benefits relating to stock-based compensation

 

 

(2.5)%

 

 

 

(2.1)%

 

 

 

(1.6)%

 

Interest, net

 

 

1.2%

 

 

 

1.4%

 

 

 

0.9%

 

Other reconciling items, net

 

 

(2.1)%

 

 

 

(2.2)%

 

 

 

(0.9)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective rate

 

 

54.6%

 

 

 

14.8%

 

 

 

19.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

2018

 

 

2017

 

 

 

 

Deferred Income Tax Assets

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

460

 

 

$

777

 

Accruals, reserves, and other expenses

 

 

1,832

 

 

 

1,859

 

Loss and credit carryforwards

 

 

3,369

 

 

 

4,809

 

Depreciation and amortization

 

 

351

 

 

 

53

 

Other

 

 

56

 

 

 

255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax assets

 

 

6,068

 

 

 

7,753

 

Less valuation allowance

 

 

  (3,186

)

 

 

  (3,310

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax assets, net of valuation allowance

 

$

2,882

 

 

$

4,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Income Tax Liabilities

 

 

 

 

 

 

 

 

 

 

 

Foreign earnings

 

$

0

 

 

$

(1,134

)

Unrealized gain on investments and debt

 

 

0

 

 

 

(1,384

)

Unearned revenue

 

 

(639

)

 

 

(5,760

)

Depreciation and amortization

 

 

(1,103

)

 

 

(1,630

)

Other

 

 

(312

)

 

 

(21

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax liabilities

 

$

(2,054

)

 

$

(9,929

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred income tax assets (liabilities)

 

$

828

 

 

$

(5,486

)

 

 

 

 

 

 

 

 

 

 

 

 

Reported As

 

 

 

 

 

 

 

 

 

 

 

Other long-term assets

 

$

1,369

 

 

$

248

 

Long-term deferred income tax liabilities

 

 

(541

)

 

 

(5,734

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred income tax assets (liabilities)

 

$

828

 

 

$

(5,486

)

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Balance, beginning of year

 

$

11,737

 

 

$

10,164

 

 

$

9,599

 

Decreases related to settlements

 

 

(193

)

 

 

(4

)

 

 

(201

)

Increases for tax positions related to the current year

 

 

1,445

 

 

 

1,277

 

 

 

1,086

 

Increases for tax positions related to prior years

 

 

151

 

 

 

397

 

 

 

115

 

Decreases for tax positions related to prior years

 

 

(1,176

)

 

 

(49

)

 

 

(317

)

Decreases due to lapsed statutes of limitations

 

 

(3

)

 

 

(48

)

 

 

(118

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of year

 

$

  11,961

 

 

$

  11,737

 

 

$

  10,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

2018

 

 

2017

 

 

 

 

Productivity and Business Processes

 

$

14,864

 

 

$

12,692

 

Intelligent Cloud

 

 

14,706

 

 

 

11,152

 

More Personal Computing

 

 

3,150

 

 

 

2,812

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  32,720

 

 

$

  26,656

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30, 2018

 

 

 

 

 

 

Balance, beginning of period

 

$

26,656

 

Deferral of revenue

 

 

61,142

 

Recognition of unearned revenue

 

 

(55,078

) 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

32,720

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

1,585

 

 

$

1,412

 

 

$

936

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

243

 

 

$

104

 

 

$

28

 

Interest on lease liabilities

 

 

175

 

 

 

68

 

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease cost

 

$

418

 

 

$

172

 

 

$

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

1,522

 

 

$

1,157

 

 

$

936

 

Operating cash flows from finance leases

 

 

175

 

 

 

68

 

 

 

28

 

Financing cash flows from finance leases

 

 

144

 

 

 

46

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

1,571

 

 

 

1,270

 

 

 

1,062

 

Finance leases

 

 

1,933

 

 

 

1,773

 

 

 

413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except lease term and discount rate)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 June 30,

 

2018

 

 

2017

 

 

 

 

Operating Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

6,686

 

 

$

6,555

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

1,399

 

 

$

1,423

 

Operating lease liabilities

 

 

5,568

 

 

 

5,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating lease liabilities

 

$

6,967

 

 

$

6,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, gross

 

$

4,543

 

 

$

2,658

 

Accumulated depreciation

 

 

(404

)

 

 

(161

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

4,139

 

 

$

2,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

176

 

 

$

113

 

Other long-term liabilities

 

 

4,125

 

 

 

2,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease liabilities

 

$

4,301

 

 

$

2,538

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

7 years

 

 

 

7 years

 

Finance leases

 

 

13 years

 

 

 

13 years

 

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

2.7%

 

 

 

2.5%

 

Finance leases

 

 

5.2%

 

 

 

4.7%

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

Operating Leases

 

 

Finance Leases

 

 

 

 

2019

 

$

1,492

 

 

$

386

 

2020

 

 

1,347

 

 

 

393

 

2021

 

 

1,086

 

 

 

401

 

2022

 

 

902

 

 

 

408

 

2023

 

 

721

 

 

 

410

 

Thereafter

 

 

2,157

 

 

 

4,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease payments

 

 

7,705

 

 

 

6,034

 

Less imputed interest

 

 

(738

)

 

 

(1,733

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,967

 

 

$

4,301

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Balance, beginning of year

 

 

7,708

 

 

 

7,808

 

 

 

8,027

 

Issued

 

 

68

 

 

 

70

 

 

 

75

 

Repurchased

 

 

(99

)

 

 

(170

)

 

 

(294

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of year

 

 

7,677

 

 

 

7,708

 

 

 

7,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

First Quarter

 

 

22

 

 

$

1,600

 

 

 

63

 

 

$

3,550

 

 

 

89

 

 

$

4,000

 

Second Quarter

 

 

22

 

 

 

1,800

 

 

 

59

 

 

 

3,533

 

 

 

66

 

 

 

3,600

 

Third Quarter

 

 

34

 

 

 

3,100

 

 

 

25

 

 

 

1,600

 

 

 

69

 

 

 

3,600

 

Fourth Quarter

 

 

21

 

 

 

2,100

 

 

 

23

 

 

 

1,600

 

 

 

70

 

 

 

3,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

99

 

 

$

  8,600

 

 

 

170

 

 

$

  10,283

 

 

 

294

 

 

$

  14,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declaration Date

Dividend

Per Share

 

 

Record Date

 

Amount

 

 

Payment Date

 

 

 

 

 

Fiscal Year 2018

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

September 19, 2017

 

$

0.42

 

 

 

November 16, 2017

 

 

$

3,238

 

 

 

December 14, 2017

 

November 29, 2017

 

 

0.42

 

 

 

February 15, 2018

 

 

 

3,232

 

 

 

March 8, 2018

 

March 12, 2018

 

 

0.42

 

 

 

May 17, 2018

 

 

 

3,226

 

 

 

June 14, 2018

 

June 13, 2018

 

 

0.42

 

 

 

August 16, 2018

 

 

 

3,224

 

 

 

September 13, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 20, 2016

 

$

  0.39

 

 

 

November 17, 2016

 

 

$

  3,024

 

 

 

December 8, 2016

 

November 30, 2016

 

 

0.39

 

 

 

February 16, 2017

 

 

 

3,012

 

 

 

March 9, 2017

 

March 14, 2017

 

 

0.39

 

 

 

May 18, 2017

 

 

 

3,009

 

 

 

June 8, 2017

 

June 13, 2017

 

 

0.39

 

 

 

August 17, 2017

 

 

 

3,003

 

 

 

September 14, 2017

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

134

 

 

$

352

 

 

$

590

 

Unrealized gains, net of tax of $11, $4, and $24

 

 

218

 

 

 

328

 

 

 

351

 

Reclassification adjustments for gains included in revenue

 

 

(185

)

 

 

(555

)

 

 

(625

)

Tax expense included in provision for income taxes

 

 

6

 

 

 

9

 

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income

 

 

(179

)

 

 

(546

)

 

 

(589

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives, net of tax of $5, $(5), and $(12)

 

 

39

 

 

 

(218

)

 

 

(238

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

173

 

 

$

134

 

 

$

352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,825

 

 

$

2,941

 

 

$

3,169

 

Unrealized gains (losses), net of tax of $(427), $267, and $120

 

 

(1,146

)

 

 

517

 

 

 

219

 

Reclassification adjustments for gains included in other income (expense), net

 

 

(2,309

)

 

 

(2,513

)

 

 

(688

)

Tax expense included in provision for income taxes

 

 

738

 

 

 

880

 

 

 

241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income

 

 

(1,571

)

 

 

(1,633

)

 

 

(447

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to investments, net of tax of $(1,165), $(613), and $(121)

 

 

(2,717

)

 

 

(1,116

)

 

 

(228

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(892

)

 

$

1,825

 

 

$

2,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation Adjustments and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

  (1,332

)

 

$

  (1,499

)

 

$

  (1,237

)

Translation adjustments and other, net of tax effects of $0, $9, and $(33)

 

 

(178

)

 

 

167

 

 

 

(262

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(1,510

)

 

$

(1,332

)

 

$

(1,499

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change

 

 

42

 

 

 

0

 

 

 

0

 

  

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss), end of period

 

$

(2,187

)

 

$

627

 

 

$

1,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Stock-based compensation expense

 

$

  3,940

 

 

$

  3,266

 

 

$

  2,668

 

Income tax benefits related to stock-based compensation

 

 

823

 

 

 

1,066

 

 

 

882

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Dividends per share (quarterly amounts)

 

 

  $0.39 - $0.42

 

 

 

  $0.36 - $0.39

 

 

 

  $0.31 - $0.36

 

Interest rates

 

 

1.7% - 2.9%

 

 

 

1.2% - 2.2%

 

 

 

1.1% - 1.8%

 

 

 

Shares

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

 

 

 

(In millions)

 

 

 

 

 

Stock Awards

  

 

 

 

Nonvested balance, beginning of year

 

 

201

 

 

 $

  46.32

 

Granted (a)

 

 

70

 

 

 

  75.88

 

Vested

 

 

(80

) 

 

 

45.74

 

Forfeited

 

 

(17

) 

 

 

  53.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested balance, end of year

 

 

174

 

 

 

57.85

 

 

 

 

 

 

 

 

 

 

(a)

Includes 3 million, 2 million, and 1 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2018, 2017, and 2016, respectively.

(Shares in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Shares purchased

 

 

13

 

 

 

13

 

 

 

15

 

Average price per share

 

$

  76.40

 

 

$

  56.36

 

 

$

  44.83

 

 

 

 

•

Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Skype for Business, and Microsoft Teams, and related Client Access Licenses (“CALs”).

 

•

Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.

 

•

LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.

 

•

Dynamics business solutions, including Dynamics ERP on-premises, Dynamics CRM on-premises, and Dynamics 365, a set of cloud-based applications across ERP and CRM.

 

•

Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, and Azure.

 

•

Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

 

•

Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Internet of Things (“IoT”); and MSN advertising.

 

•

Devices, including Microsoft Surface, PC accessories, and other intelligent devices.

 

•

Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, and advertising (“Xbox Live”), video games, and third-party video game royalties.

 

•

Search.

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2018

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

35,865

 

 

$

29,870

 

 

$

25,792

 

Intelligent Cloud

 

 

32,219

 

 

 

27,407

 

 

 

24,952

 

More Personal Computing

 

 

42,276

 

 

 

39,294

 

 

 

40,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  110,360

 

 

$

96,571

 

 

$

91,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

12,924

 

 

$

11,389

 

 

$

11,756

 

Intelligent Cloud

 

 

11,524

 

 

 

9,127

 

 

 

9,249

 

More Personal Computing

 

 

10,610

 

 

 

8,815

 

 

 

6,183

 

Corporate and Other

 

 

0

 

 

 

(306

)

 

 

(1,110

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

35,058

 

 

$

29,025

 

 

$

26,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

United States (a)

 

$

55,926

 

 

$

51,078

 

 

$

46,416

 

Other countries

 

 

54,434

 

 

 

45,493

 

 

 

44,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  110,360

 

 

$

  96,571

 

 

$

  91,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

(In millions)

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

Office products and cloud services

 

$

28,316

 

 

$

25,573

 

 

$

23,868

 

Server products and cloud services

 

 

26,129

 

 

 

21,649

 

 

 

19,062

 

Windows

 

 

19,518

 

 

 

18,593

 

 

 

17,548

 

Gaming

 

 

10,353

 

 

 

9,051

 

 

 

9,202

 

Search advertising

 

 

7,012

 

 

 

6,219

 

 

 

5,428

 

Enterprise Services

 

 

5,846

 

 

 

5,542

 

 

 

5,659

 

Devices

 

 

5,134

 

 

 

5,062

 

 

 

7,888

 

LinkedIn

 

 

5,259

 

 

 

2,271

 

 

 

0

 

Other

 

 

2,793

 

 

 

2,611

 

 

 

2,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  110,360

 

 

$

  96,571

 

 

$

  91,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

June 30,

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

United States

 

$

44,501

 

 

$

42,730

 

 

$

25,145

 

Ireland

 

 

12,843

 

 

 

12,889

 

 

 

2,099

 

Luxembourg

 

 

6,856

 

 

 

6,854

 

 

 

6,868

 

Other countries

 

 

15,682

 

 

 

13,044

 

 

 

11,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  79,882

 

 

$

  75,517

 

 

$

  45,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

September 30

 

 

December 31

 

 

March 31

 

 

June 30

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

  24,538

 

 

$

  28,918

 

 

$

  26,819

 

 

$

  30,085

 

 

$

  110,360

 

Gross margin

 

 

16,260

 

 

 

17,854

 

 

 

17,550

 

 

 

20,343

 

 

 

72,007

 

Operating income

 

 

7,708

 

 

 

8,679

 

 

 

8,292

 

 

 

10,379

 

 

 

35,058

 

Net income (loss) (a)

 

 

6,576

 

 

 

(6,302

)

 

 

7,424

 

 

 

8,873

 

 

 

16,571

 

Basic earnings (loss) per share

 

 

0.85

 

 

 

(0.82

)

 

 

0.96

 

 

 

1.15

 

 

 

2.15

 

Diluted earnings (loss) per share (b)

 

 

0.84

 

 

 

(0.82

)

 

 

0.95

 

 

 

1.14

 

 

 

2.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2017 (c)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

  21,928

 

 

$

  25,826

 

 

$

  23,212

 

 

$

  25,605

 

 

$

  96,571

 

Gross margin

 

 

14,084

 

 

 

15,925

 

 

 

15,152

 

 

 

17,149

 

 

 

62,310

 

Operating income

 

 

6,715

 

 

 

7,905

 

 

 

6,723

 

 

 

7,682

(d) 

 

 

29,025

(d)

Net income

 

 

5,667

 

 

 

6,267

 

 

 

5,486

 

 

 

8,069

(d)

 

 

25,489

(d)

Basic earnings per share

 

 

0.73

 

 

 

0.81

 

 

 

0.71

 

 

 

1.05

 

 

 

3.29

 

Diluted earnings per share

 

 

0.72

 

 

 

0.80

 

 

 

0.70

 

 

 

1.03

(d)

 

 

3.25

(d)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Reflects the net charge (benefit) related to the TCJA of $13.8 billion for the second quarter, $(104) million for the fourth quarter, and $13.7 billion for fiscal year 2018.

(b)

Reflects the net charge (benefit) related to the TCJA, which decreased (increased) diluted EPS $1.78 for the second quarter, $(0.01) for the fourth quarter, and $1.75 for fiscal year 2018.

(c)

On December 8, 2016, we acquired LinkedIn Corporation. LinkedIn has been included in our consolidated results of operations starting on the acquisition date.

(d)

Includes $306 million of employee severance expenses primarily related to our sales and marketing restructuring plan, which decreased operating income, net income, and diluted EPS by $306 million, $243 million, and $0.04, respectively.

(a)

Financial Statements and Schedules

Index to Financial Statements

 

Page

 

 

 

 

 

Income Statements

 

51

 

 

 

Comprehensive Income Statements

 

52

 

 

 

Balance Sheets

 

53

 

 

 

Cash Flows Statements

 

54

 

 

 

Stockholders’ Equity Statements

 

55

 

 

 

Notes to Financial Statements

 

56

 

 

 

Report of Independent Registered Public Accounting Firm

 

97

 

(b)

Exhibit Listing

 

 

 

 

 

Incorporated by Reference

 

Exhibit
Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

 

Period

Ending

 

 

Exhibit

 

 

Filing Date

 

 

 

 

 

 

 

 

 

3.1

 

Amended and Restated Articles of Incorporation of Microsoft Corporation

 

 

 

 

8-K

 

 

 

 

 

 

 

3.1

 

 

 

12/1/16

 

 

 

 

 

 

 

 

3.2

 

Bylaws of Microsoft Corporation

 

 

 

 

8-K

 

 

 

 

 

 

 

3.2

 

 

 

6/14/17

 

 

 

 

 

 

 

 

4.1

 

Form of Indenture between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee (“Base Indenture”)

 

 

 

 

S-3ASR

 

 

 

 

 

 

 

4.1

 

 

 

11/20/08

 

 

 

 

 

 

 

 

4.2

 

Form of First Supplemental Indenture for 2.95% Notes due 2014, 4.20% Notes due 2019, and 5.20% Notes due 2039, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Base Indenture

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

5/15/09

 

 

 

 

 

 

 

 

4.5

 

Form of Second Supplemental Indenture for 0.875% Notes due 2013, 1.625% Notes due 2015, 3.00% Notes due 2020, and 4.50% Notes due 2040, dated as of September 27, 2010, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

9/27/10

 

 

 

 

 

 

Incorporated by Reference

 

Exhibit
Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

 

Period

Ending

 

 

Exhibit

 

 

Filing Date

 

 

 

 

 

 

 

 

 

4.6

 

Third Supplemental Indenture for 2.500% Notes due 2016, 4.000% Notes due 2021, and 5.300% Notes due 2041, dated as of February 8, 2011, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

2/8/11

 

 

 

 

 

 

 

 

4.7

 

Fourth Supplemental Indenture for 0.875% Notes due 2017, 2.125% Notes due 2022, and 3.500% Notes due 2042, dated as of November 7, 2012, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

11/7/12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.8

 

Fifth Supplemental Indenture for 2.625% Notes due 2033, dated as of May 2, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

5/1/13

 

 

 

 

 

 

 

 

4.9

 

Sixth Supplemental Indenture for 1.000% Notes due 2018, 2.375% Notes due 2023, and 3.750% Notes due 2043, dated as of May 2, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

5/1/13

 

 

 

 

 

 

 

 

4.10

 

Seventh Supplemental Indenture for 2.125% Notes due 2021 and 3.125% Notes due 2028, dated as of December 6, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

12/6/13

 

 

 

 

 

 

Incorporated by Reference

 

Exhibit
Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

 

Period

Ending

 

 

Exhibit

 

 

Filing Date

 

 

 

 

 

 

 

 

 

4.11

 

Eighth Supplemental Indenture for 1.625% Notes due 2018, 3.625% Notes due 2023, and 4.875% Notes due 2043, dated as of December 6, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

12/6/13

 

 

 

 

 

 

 

 

4.12

 

Ninth Supplemental Indenture for 1.850% Notes due 2020, 2.375% Notes due 2022, 2.700% Notes due 2025, 3.500% Notes due 2035, 3.750% Notes due 2045, and 4.000% Notes due 2055, dated as of February 12, 2015, between Microsoft Corporation and U.S. Bank National Association, as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

2/12/15

 

 

 

 

 

 

 

 

 

4.13

 

Tenth Supplemental Indenture for 1.300% Notes due 2018, 2.000% Notes due 2020, 2.650% Notes due 2022, 3.125% Notes due 2025, 4.200% Notes due 2035, 4.450% Notes due 2045, and 4.750% Notes due 2055, dated as of November 3, 2015, between Microsoft Corporation and U.S. Bank National Association, as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

11/3/15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.14

 

Eleventh Supplemental Indenture for 1.100% Notes due 2019, 1.550% Notes due 2021, 2.000% Notes due 2023, 2.400% Notes due 2026, 3.450% Notes due 2036, 3.700% Notes due 2046, and 3.950% Notes due 2056, dated as of August 8, 2016, between Microsoft Corporation and U.S. Bank, National Association, as trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

8/5/16

 

 

 

 

 

 

Incorporated by Reference

 

Exhibit
Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

 

Period

Ending

 

 

Exhibit

 

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.15

 

Twelfth Supplemental Indenture for 1.850% Notes due 2020, 2.400% Notes due 2022, 2.875% Notes due 2024, 3.300% Notes due 2027, 4.100% Notes due 2037, 4.250% Notes due 2047, and 4.500% Notes due 2057, dated as of February 6, 2017, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

2/3/17

 

 

 

 

 

 

 

 

10.1*

 

Microsoft Corporation 2001 Stock Plan

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.1

 

 

 

10/20/16

 

 

 

 

 

 

 

 

10.4*

 

Microsoft Corporation Employee Stock Purchase Plan

 

 

 

 

10-K

 

 

 

6/30/12

 

 

 

10.4

 

 

 

7/26/12

 

 

 

 

 

 

 

 

10.5*

 

Microsoft Corporation Deferred Compensation Plan

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.6*

 

Microsoft Corporation 2017 Stock Plan

 

 

 

 

DEF14A

 

 

 

 

 

 

 

Annex C

 

 

 

10/16/17

 

 

 

 

 

 

 

 

10.7*

 

Form of Stock Award Agreement Under the Microsoft Corporation 2017 Stock Plan

 

 

 

 

10-Q

 

 

 

3/31/2018

 

 

 

10.26

 

 

 

4/26/18

 

 

 

 

 

 

 

 

10.8*

 

Form of Performance Stock Award Agreement Under the Microsoft Corporation 2017 Stock Plan

 

 

 

 

10-Q

 

 

 

3/31/2018

 

 

 

10.27

 

 

 

4/26/18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.12

 

Amended and Restated Officers’ Indemnification Trust Agreement between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.12

 

 

 

10/20/16

 

 

 

 

 

 

 

 

10.13

 

Amended and Restated Directors’ Indemnification Trust Agreement between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.13

 

 

 

10/20/16

 

 

 

 

 

 

 

 

10.14*

 

Microsoft Corporation Deferred Compensation Plan for Non-Employee Directors

 

 

 

 

 

10-Q

 

 

 

 12/31/17

 

 

 

10.14

 

 

 

1/31/18

 

 

 

 

 

 

 

 

10.17*

 

Executive Officer Incentive Plan

 

 

 

 

10-Q

 

 

 

9/30/15

 

 

 

10.17

 

 

 

10/22/15

 

 

 

 

 

 

 

 

10.18*

 

Form of Executive Officer Incentive Plan Stock Award Agreement under the Microsoft Corporation 2001 Stock Plan

 

 

 

 

10-Q

 

 

 

 

9/30/15

 

 

 

10.18

 

 

 

10/22/15

 

 

 

 

 

 

 

 

10.19*

 

Microsoft Corporation Executive Incentive Plan

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.17

 

 

 

10/20/16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.20*

 

Form of Executive Incentive Plan (Executive Officer SAs) Stock Award Agreement under the Microsoft Corporation 2001 Stock Plan

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.18

 

 

 

10/20/16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incorporated by Reference

 

Exhibit
Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

 

Period

Ending

 

 

Exhibit

 

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.21*

 

Form of Executive Incentive Plan Performance Stock Award Agreement under the Microsoft Corporation 2001 Stock Plan

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.25

 

 

 

10/20/16

 

 

 

 

 

 

 

 

 

10.22*

 

Senior Executive Severance Benefit Plan 

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.22

 

 

 

10/20/16

 

 

 

 

 

 

 

 

10.23*

 

Offer Letter, dated February 3, 2014, between Microsoft Corporation and Satya Nadella

 

 

 

 

8-K

 

 

 

 

 

 

 

10.1

 

 

 

2/4/14

 

 

 

 

 

 

 

 

10.24*

 

Long-Term Performance Stock Award Agreement between Microsoft Corporation and Satya Nadella

 

 

 

 

10-Q

 

 

 

12/31/14

 

 

 

10.24

 

 

 

1/26/15

 

 

 

 

 

 

 

 

10.25*

 

Form of Executive Officer Incentive Plan Performance Stock Award Agreement under the Microsoft Corporation 2001 Stock Plan

 

 

 

 

10-Q

 

 

 

9/30/15

 

 

 

10.25

 

 

 

10/22/15

 

 

 

 

 

 

 

 

12

 

Computation of Ratios of Earnings to Fixed Charges

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

Subsidiaries of Registrant

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23.1

 

Consent of Independent Registered Public Accounting Firm

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1**

 

Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.2**

 

Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Indicates a management contract or compensatory plan or arrangement

**

Furnished, not filed

MICROSOFT CORPORATION

 

/S/    FRANK H. BROD

Frank H. Brod

Corporate Vice President, Finance and Administration;

Chief Accounting Officer (Principal Accounting Officer)

Signature

 

Title

 

 

 

/s/    JOHN W. THOMPSON        

 

John W. Thompson

 

Chairman

 

 

/s/    SATYA NADELLA        

 

Satya Nadella

 

Director and Chief Executive Officer

 

 

/s/    WILLIAM H. GATES III         

 

William H. Gates III

 

Director

 

 

/s/    REID HOFFMAN         

 

Reid Hoffman

 

Director

 

 

/s/    HUGH F. JOHNSTON        

 

Hugh F. Johnston

 

Director

 

 

/s/    TERI L. LIST-STOLL                

 

Teri L. List-Stoll

 

Director

 

 

/s/    CHARLES H. NOSKI                

 

Charles H. Noski

 

Director

 

 

/s/    HELMUT PANKE                

 

Helmut Panke

 

Director

 

 

/s/    SANDRA E. PETERSON

 

Sandra E. Peterson

 

Director

 

 

 

/s/    PENNY S. PRITZKER        

 

Penny S. Pritzker

 

Director

 

 

/s/    CHARLES W. SCHARF        

 

Charles W. Scharf

 

Director

 

 

/s/    ARNE M. SORENSON        

 

Arne M. Sorenson

 

Director

 

 

 

 

/s/    JOHN W. STANTON        

 

John W. Stanton

 

Director

 

 

/s/    PADMASREE WARRIOR

 

Padmasree Warrior

 

Director

 

 

/s/    AMY E. HOOD        

 

Amy E. Hood

 

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

/s/    FRANK H. BROD        

 

Frank H. Brod

 

Corporate Vice President, Finance and Administration;

Chief Accounting Officer

(Principal Accounting Officer)

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

WASHINGTON

 

91-1144442

(STATE OF INCORPORATION)

 

(I.R.S. ID)

 

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

 

 

 

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

 

 

 

 

 

COMMON STOCK, $0.00000625 par value per share

 

MSFT

 

NASDAQ

2.125% Notes due 2021

 

MSFT

 

New York Stock Exchange

3.125% Notes due 2028

 

MSFT

 

New York Stock Exchange

2.625% Notes due 2033

 

MSFT

 

New York Stock Exchange

 

 

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

 

 

 

 

 

 

 

NONE

 

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

 

 

 

 

 

Page

 

 

 

 

 

PART I

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Business

 

3

 

 

 

 

 

 

 

 

 

Executive Officers of the Registrant

 

15

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

17

 

 

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

29

 

 

 

 

 

 

 

Item 2.

 

Properties

 

29

 

 

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

29

 

 

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

29

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

30

 

 

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

31

 

 

 

 

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

32

 

 

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

50

 

 

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

51

 

 

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

96

 

 

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

96

 

 

 

 

 

 

 

 

 

Report of Management on Internal Control over Financial Reporting

 

96

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

97

 

 

 

 

 

 

 

Item 9B.

 

Other Information

 

98

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

98

 

 

 

 

 

 

 

Item 11.

 

Executive Compensation

 

98

 

 

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

98

 

 

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

98

 

 

 

 

 

 

 

Item 14.

 

Principal Accounting Fees and Services

 

98

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

99

 

 

 

 

 

 

 

Item 16.

 

Form 10-K Summary

 

104

 

 

 

 

 

 

 

 

 

 

 

 

 

Signatures

 

105

 

 

•

Reinvent productivity and business processes.

 

•

Build the intelligent cloud and intelligent edge platform.

 

•

Create more personal computing.

 

•

Transforming the workplace to deliver new modern, modular business applications to improve how people communicate, collaborate, learn, work, play, and interact with one another.

 

•

Building and running cloud-based services in ways that unleash new experiences and opportunities for businesses and individuals.

 

•

Applying AI to drive insights and act on our customer’s behalf by understanding and interpreting their needs using natural methods of communication.

 

•

Using Windows to fuel our cloud business and Microsoft 365 strategy, and to develop new categories of devices – both our own and third-party – on the intelligent edge.

 

•

Inventing new gaming experiences that bring people together around their shared love for games on any devices and pushing the boundaries of innovation with console and PC gaming by creating the next wave of entertainment.

 

•

Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”).

 

•

Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.

 

•

LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.

 

•

Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises.

 

•

Server products and cloud services, including SQL Server, Windows Server, Visual Studio, System Center, and related CALs, GitHub, and Azure.

 

•

Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

 

•

Windows, including Windows OEM licensing (“Windows OEM”) and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows IoT; and MSN advertising.

 

•

Devices, including Surface, PC accessories, and other intelligent devices.

 

•

Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, cloud services, and advertising (“Xbox Live”), video games, and third-party video game royalties.

 

•

Search.

 

•

The mix of computing devices based on form factor and screen size.

 

•

Differences in device market demand between developed markets and growth markets.

 

•

Attachment of Windows to devices shipped.

 

•

Customer mix between consumer, small and medium businesses, and large enterprises.

 

•

Changes in inventory levels in the OEM channel.

 

•

Pricing changes and promotions, pricing variation that occurs when the mix of devices manufactured shifts from local and regional system builders to large multinational OEMs, and different pricing of Windows versions licensed.

 

•

Constraints in the supply chain of device components.

 

•

Piracy.

 

•

Cloud and AI, focuses on making IT professionals, developers, and their systems more productive and efficient through development of cloud infrastructure, server, database, CRM, ERP, management and development tools, AI cognitive services, and other business process applications and services for enterprises.

 

•

Experiences and Devices, focuses on instilling a unifying product ethos across our end-user experiences and devices, including Office, Windows, Enterprise Mobility and Management, and Surface.

 

•

AI and Research, focuses on our AI innovations and other forward-looking research and development efforts spanning infrastructure, services, applications, and search.

 

•

LinkedIn, focuses on our services that transform the way customers hire, market, sell, and learn.

 

•

Gaming, focuses on connecting gaming assets across the range of devices to grow and engage the Xbox Live member network through game experiences, streaming content, and social interaction.

Name

 

Age

 

 

Position with the Company

 

 

 

 

Satya Nadella

 

 

51

 

 

Chief Executive Officer

Christopher C. Capossela

 

 

49

 

 

Executive Vice President, Marketing and Consumer Business, and Chief Marketing Officer

Jean-Philippe Courtois

 

 

58

 

 

Executive Vice President and President, Microsoft Global Sales, Marketing and Operations

Kathleen T. Hogan

 

 

53

 

 

Executive Vice President, Human Resources

Amy E. Hood

 

 

47

 

 

Executive Vice President, Chief Financial Officer

Margaret L. Johnson

 

 

57

 

 

Executive Vice President, Business Development

Bradford L. Smith

 

 

60

 

 

President and Chief Legal Officer

 

 

•

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to the Securities and Exchange Commission (“SEC”) at www.sec.gov.

 

•

Information on our business strategies, financial results, and metrics for investors.

 

•

Announcements of investor conferences, speeches, and events at which our executives talk about our product, service, and competitive strategies. Archives of these events are also available.

 

•

Press releases on quarterly earnings, product and service announcements, legal developments, and international news.

 

•

Corporate governance information including our articles of incorporation, bylaws, governance guidelines, committee charters, codes of conduct and ethics, global corporate social responsibility initiatives, and other governance-related policies.

 

•

Other news and announcements that we may post from time to time that investors might find useful or interesting.

 

•

Opportunities to sign up for email alerts to have information pushed in real time.

 

•

A competing vertically-integrated model, in which a single firm controls the software and hardware elements of a product and related services, has succeeded with some consumer products such as personal computers, tablets, phones, gaming consoles, wearables, and other endpoint devices. Competitors pursuing this model also earn revenue from services integrated with the hardware and software platform, including applications and content sold through their integrated marketplaces. They may also be able to claim security and performance benefits from their vertically integrated offer. We also offer some vertically-integrated hardware and software products and services. To the extent we shift a portion of our business to a vertically integrated model we increase our cost of revenue and reduce our operating margins.

 

•

We derive substantial revenue from licenses of Windows operating systems on personal computers. We face significant competition from competing platforms developed for new devices and form factors such as smartphones and tablet computers. These devices compete on multiple bases including price and the perceived utility of the device and its platform. Users are increasingly turning to these devices to perform functions that in the past were performed by personal computers. Even if many users view these devices as complementary to a personal computer, the prevalence of these devices may make it more difficult to attract application developers to our PC operating system platforms. Competing with operating systems licensed at low or no cost may decrease our PC operating system margins. Popular products or services offered on competing platforms could increase their competitive strength. In addition, some of our devices compete with products made by our original equipment manufacturer (“OEM”) partners, which may affect their commitment to our platform.

 

•

Competing platforms have content and application marketplaces with scale and significant installed bases. The variety and utility of content and applications available on a platform are important to device purchasing decisions. Users may incur costs to move data and buy new content and applications when switching platforms. To compete, we must successfully enlist developers to write applications for our platform and ensure that these applications have high quality, security, customer appeal, and value. Efforts to compete with competitors’ content and application marketplaces may increase our cost of revenue and lower our operating margins.

 

•

Even as we transition more of our business to infrastructure-, platform-, and software-as-a-service business model, the license-based proprietary software model generates a substantial portion of our software revenue. We bear the costs of converting original ideas into software products through investments in research and development, offsetting these costs with the revenue received from licensing our products. Many of our competitors also develop and sell software to businesses and consumers under this model.

 

•

Other competitors develop and offer free applications, online services and content, and make money by selling third-party advertising. Advertising revenue funds development of products and services these competitors provide to users at no or little cost, competing directly with our revenue-generating products.

 

•

Some companies compete with us by modifying and then distributing open source software at little or no cost to end-users, and earning revenue on advertising or integrated products and services. These firms do not bear the full costs of research and development for the open source software. Some open source software mimics the features and functionality of our products.

 

•

Continuing to bring to market compelling cloud-based experiences that generate increasing traffic and market share.

 

•

Maintaining the utility, compatibility, and performance of our cloud-based services on the growing array of computing devices, including PCs, smartphones, tablets, gaming consoles, and other devices, as well as sensors and other endpoints.

 

•

Continuing to enhance the attractiveness of our cloud platforms to third-party developers.

 

•

Ensuring our cloud-based services meet the reliability expectations of our customers and maintain the security of their data.

 

•

Making our suite of cloud-based services platform-agnostic, available on a wide range of devices and ecosystems, including those of our competitors.

 

•

We may have to choose between withdrawing products from certain geographies to avoid fines or designing and developing alternative versions of those products to comply with government rulings, which may entail a delay in a product release and removing functionality that customers want or on which developers rely.

 

•

We may be required to make available licenses to our proprietary technologies on terms that do not reflect their fair market value or do not protect our associated intellectual property.

 

•

We are subject to a variety of ongoing commitments because of court or administrative orders, consent decrees, or other voluntary actions we have taken. If we fail to comply with these commitments, we may incur litigation costs and be subject to substantial fines or other remedial actions.

 

•

Our ability to realize anticipated Windows 10 post-sale monetization opportunities may be limited.

 

•

The introduction of new features, products, services, or terms of service that customers, users, or partners do not like.

 

•

Public scrutiny of our decisions regarding user privacy, data practices, or content.

 

•

Data security breaches, compliance failures, or actions of partners or individual employees.

(Square feet in millions)

 

 

 

 

 

 

 

 

Location

 

Owned

 

 

Leased

 

 

Total

 

 

 

 

 

U.S.

 

 

18

 

 

 

14

 

 

 

32

 

International

 

 

6

 

 

 

14

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 24

 

 

 

28

 

 

 

  52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number
of Shares

Purchased

 

 

Average

Price Paid
per Share

 

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs

 

 

Approximate Dollar Value of

Shares that May Yet be

Purchased under the Plans
or Programs

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

April 1, 2019 – April 30, 2019

 

 

8,547,612

 

 

$

122.85

 

 

 

8,547,612

 

 

$

14,551

 

May 1, 2019 – May 31, 2019

 

 

14,029,339

 

 

 

126.32

 

 

 

14,029,339

 

 

 

12,778

 

June 1, 2019 – June 30, 2019

 

 

10,469,682

 

 

 

131.59

 

 

 

10,469,682

 

 

 

11,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,046,633

 

 

 

 

 

 

 

33,046,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declaration Date

 

 

Record Date

 

 

 

Payment Date

 

 

 

Dividend

Per Share

 

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 12, 2019

 

 

August 15, 2019

 

 

 

September 12, 2019

 

 

$

0.46

 

 

$

3,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2019

(a)

 

 

2018

 

 

 

2017

(d)(e)

 

 

2016

(d)

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

125,843

 

 

$

110,360

 

 

$

96,571

 

 

$

91,154

 

 

$

93,580

 

Gross margin

 

 

82,933

 

 

 

72,007

 

 

 

62,310

 

 

 

58,374

 

 

 

60,542

 

Operating income

 

 

42,959

 

 

 

35,058

 

 

 

29,025

(f)

 

 

26,078

(g)

 

 

18,161

(h)

Net income

 

 

39,240

(b)

 

 

16,571

(c)

 

 

25,489

(f)

 

 

20,539

(g)

 

 

12,193

(h)

Diluted earnings per share

 

 

5.06

(b)

 

 

2.13

(c)

 

 

3.25

(f)

 

 

2.56

(g)

 

 

1.48

(h)

Cash dividends declared per share

 

 

1.84

 

 

 

1.68

 

 

 

1.56

 

 

 

1.44

 

 

 

1.24

 

Cash, cash equivalents, and short-term investments

 

 

133,819

 

 

 

133,768

 

 

 

132,981

 

 

 

113,240

 

 

 

96,526

 

Total assets

 

 

286,556

 

 

 

258,848

 

 

 

250,312

 

 

 

  202,897

 

 

 

174,303

 

Long-term obligations

 

 

114,806

 

 

 

117,642

 

 

 

106,856

 

 

 

66,705

 

 

 

44,574

 

Stockholders’ equity

 

 

102,330

 

 

 

82,718

 

 

 

87,711

 

 

 

83,090

 

 

 

80,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

GitHub has been included in our consolidated results of operations starting on the October 25, 2018 acquisition date.

(b)

Includes a $2.6 billion net income tax benefit related to intangible property transfers and a $157 million net charge related to the enactment of the Tax Cuts and Jobs Act (“TCJA”), which together increased net income and diluted earnings per share (“EPS”) by $2.4 billion and $0.31, respectively. Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.

(c)

Includes a $13.7 billion net charge related to the enactment of the TCJA, which decreased net income and diluted EPS by $13.7 billion and $1.75, respectively. Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.

(d)

Reflects the impact of the adoption of new accounting standards in fiscal year 2018 related to revenue recognition and leases.

(e)

LinkedIn has been included in our consolidated results of operations starting on the December 8, 2016 acquisition date.

(f)

Includes $306 million of employee severance expenses primarily related to our sales and marketing restructuring plan, which decreased operating income, net income, and diluted EPS by $306 million, $243 million, and $0.04, respectively.   

(g)

Includes $630 million of asset impairment charges related to our Phone business and $480 million of restructuring charges associated with our Phone business restructuring plans, which together decreased operating income, net income, and diluted EPS by $1.1 billion, $895 million, and $0.11, respectively.

(h)

Includes $7.5 billion of goodwill and asset impairment charges related to our Phone business and $2.5 billion of integration and restructuring expenses, primarily associated with our Phone business restructuring plans, which together decreased operating income, net income, and diluted EPS by $10.0 billion, $9.5 billion, and $1.15, respectively.

 

•

Commercial cloud revenue, which includes Microsoft Office 365 Commercial, Microsoft Azure, the commercial portion of LinkedIn, Microsoft Dynamics 365, and other commercial cloud properties, increased 43% to $38.1 billion.

 

•

Office Commercial revenue increased 13%, driven by Office 365 Commercial growth of 33%.

 

•

Office Consumer revenue increased 7%, and Office 365 Consumer subscribers increased to 34.8 million.

 

•

LinkedIn revenue increased 28%, with record levels of engagement highlighted by LinkedIn sessions growth of 27%.

 

•

Dynamics revenue increased 15%, driven by Dynamics 365 growth of 47%.

 

•

Server products and cloud services revenue, including GitHub, increased 25%, driven by Azure growth of 72%.

 

•

Enterprise Services revenue increased 5%.

 

•

Windows original equipment manufacturer licensing (“Windows OEM”) revenue increased 4%.

 

•

Windows Commercial revenue increased 14%.

 

•

Microsoft Surface revenue increased 23%.

 

•

Gaming revenue increased 10%, driven by Xbox software and services growth of 19%.

 

•

Search advertising revenue, excluding traffic acquisition costs, increased 13%.

(In millions, except percentages and per share amounts)

 

2019

 

 

2018

 

 

2017

 

 

Percentage
Change 2019

Versus 2018

 

 

Percentage
Change 2018

Versus 2017

 

 

 

Revenue

 

$

125,843

 

 

$

110,360

 

 

$

96,571

 

 

 

14%

 

 

 

14%

 

Gross margin

 

 

82,933

 

 

 

72,007

 

 

 

62,310

 

 

 

15%

 

 

 

16%

 

Operating income

 

 

42,959

 

 

 

35,058

 

 

 

29,025

 

 

 

23%

 

 

 

21%

 

Net income

 

 

39,240

 

 

 

16,571

 

 

 

25,489

 

 

 

137%

 

 

 

(35)%

 

Diluted earnings per share

 

 

5.06

 

 

 

2.13

 

 

 

3.25

 

 

 

138%

 

 

 

(34)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP operating income

 

 

42,959

 

 

 

35,058

 

 

 

29,331

 

 

 

23%

 

 

 

20%

 

Non-GAAP net income

 

 

36,830

 

 

 

30,267

 

 

 

25,732

 

 

 

22%

 

 

 

18%

 

Non-GAAP diluted earnings per share

 

 

4.75

 

 

 

3.88

 

 

 

3.29

 

 

 

22%

 

 

 

18%

 

 

 

 

•

Cost of revenue increased $4.6 billion or 12%, driven by growth in commercial cloud, Surface, and Gaming.

 

•

Research and development expenses increased $2.2 billion or 15%, driven by investments in cloud and artificial intelligence (“AI”) engineering, Gaming, LinkedIn, and GitHub.

 

•

Sales and marketing expenses increased $744 million or 4%, driven by investments in commercial sales capacity, LinkedIn, and GitHub, offset in part by a decrease in marketing. Sales and marketing expenses included a favorable foreign currency impact of 2%.

 

•

Cost of revenue increased $4.1 billion or 12%, mainly due to growth in our commercial cloud, Gaming, LinkedIn, and Search advertising, offset in part by a reduction in Phone cost of revenue.

 

•

Sales and marketing expenses increased $2.0 billion or 13%, primarily due to LinkedIn expenses and investments in commercial sales capacity, offset in part by a decrease in Windows marketing expenses.

 

•

Research and development expenses increased $1.7 billion or 13%, primarily due to investments in cloud engineering and LinkedIn expenses.

 

•

General and administrative expenses increased $273 million or 6%, primarily due to LinkedIn expenses.

 

(In millions, except percentages)

 

2019

 

 

2018

 

 

2017

 

 

Percentage
Change 2019

Versus 2018

 

 

Percentage
Change 2018

Versus 2017

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

41,160

 

 

$

35,865

 

 

$

29,870

 

 

 

15%

 

 

 

20%

 

Intelligent Cloud

 

 

38,985

 

 

 

32,219

 

 

 

27,407

 

 

 

21%

 

 

 

18%

 

More Personal Computing

 

 

45,698

 

 

 

42,276

 

 

 

39,294

 

 

 

8%

 

 

 

8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

125,843

 

 

$

110,360

 

 

$

96,571

 

 

 

14%

 

 

 

14%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

16,219

 

 

$

12,924

 

 

$

11,389

 

 

 

25%

 

 

 

13%

 

Intelligent Cloud

 

 

13,920

 

 

 

11,524

 

 

 

9,127

 

 

 

21%

 

 

 

26%

 

More Personal Computing

 

 

12,820

 

 

 

10,610

 

 

 

8,815

 

 

 

21%

 

 

 

20%

 

Corporate and Other

 

 

0

 

 

 

0

 

 

 

(306

)

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

42,959

 

 

$

35,058

 

 

$

29,025

 

 

 

23%

 

 

 

21%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Not meaningful.

 

•

Office Commercial revenue increased $3.2 billion or 13%, driven by Office 365 Commercial, offset in part by lower revenue from products licensed on-premises, reflecting a continued shift to cloud offerings. Office 365 Commercial grew 33%, due to growth in seats and higher average revenue per user.

 

•

Office Consumer revenue increased $286 million or 7%, driven by Office 365 Consumer, due to recurring subscription revenue and transactional strength in Japan.

 

•

LinkedIn revenue increased $1.5 billion or 28%, driven by growth across each line of business.

 

•

Dynamics revenue increased 15%, driven by Dynamics 365 growth.

 

•

Gross margin increased $4.1 billion or 15%, driven by growth in Office Commercial and LinkedIn. Gross margin percentage increased slightly, due to gross margin percentage improvement in LinkedIn and Office 365 Commercial, offset in part by an increased mix of cloud offerings.

 

•

Operating expenses increased $806 million or 6%, driven by investments in LinkedIn and cloud engineering, offset in part by a decrease in marketing.

 

•

Server products and cloud services revenue, including GitHub, increased $6.5 billion or 25%, driven by Azure. Azure revenue growth was 72%, due to higher infrastructure-as-a-service and platform-as-a-service consumption-based and per user-based services. Server products revenue increased 6%, due to continued demand for premium versions and hybrid solutions, GitHub, and demand ahead of end-of-support for SQL Server 2008 and Windows Server 2008.

 

•

Enterprise Services revenue increased $278 million or 5%, driven by growth in Premier Support Services and Microsoft Consulting Services.

 

•

Gross margin increased $4.8 billion or 22%, driven by growth in server products and cloud services revenue and cloud services scale and efficiencies. Gross margin percentage increased slightly, due to gross margin percentage improvement in Azure, offset in part by an increased mix of cloud offerings.

 

•

Operating expenses increased $2.4 billion or 22%, driven by investments in cloud and AI engineering, GitHub, and commercial sales capacity.

 

•

Windows revenue increased $877 million or 4%, driven by growth in Windows Commercial and Windows OEM, offset in part by a decline in patent licensing. Windows Commercial revenue increased 14%, driven by an increased mix of multi-year agreements that carry higher in-quarter revenue recognition. Windows OEM revenue increased 4%. Windows OEM Pro revenue grew 10%, ahead of the commercial PC market, driven by healthy Windows 10 demand. Windows OEM non-Pro revenue declined 7%, below the consumer PC market, driven by continued pressure in the entry level category.

 

•

Surface revenue increased $1.1 billion or 23%, with strong growth across commercial and consumer.

 

•

Gaming revenue increased $1.0 billion or 10%, driven by Xbox software and services growth of 19%, primarily due to third-party title strength and subscriptions growth, offset in part by a decline in Xbox hardware of 13% primarily due to a decrease in volume of consoles sold.

 

•

Search advertising revenue increased $616 million or 9%. Search advertising revenue, excluding traffic acquisition costs, increased 13%, driven by higher revenue per search.

 

•

Gross margin increased $2.0 billion or 9%, driven by growth in Windows, Gaming, and Search. Gross margin percentage increased slightly, due to a sales mix shift to higher gross margin businesses in Windows and Gaming.

 

•

Operating expenses decreased $172 million or 1%.

 

•

LinkedIn revenue increased $3.0 billion to $5.3 billion. Fiscal year 2018 included a full period of results, whereas fiscal year 2017 only included results from the date of acquisition on December 8, 2016. LinkedIn revenue primarily consisted of revenue from Talent Solutions.

 

•

Office Commercial revenue increased $2.4 billion or 11%, driven by Office 365 Commercial revenue growth, mainly due to growth in subscribers and average revenue per user, offset in part by lower revenue from products licensed on-premises, reflecting a continued shift to Office 365 Commercial.

 

•

Office Consumer revenue increased $382 million or 11%, driven by Office 365 Consumer revenue growth, mainly due to growth in subscribers.

 

•

Dynamics revenue increased 13%, driven by Dynamics 365 revenue growth.

 

•

Gross margin increased $4.4 billion or 19%, driven by LinkedIn and growth in Office Commercial. Gross margin percentage decreased slightly, due to an increased mix of cloud offerings, offset in part by gross margin percentage improvement in Office 365 Commercial and LinkedIn. LinkedIn cost of revenue increased $818 million to $1.7 billion, including $888 million of amortization for acquired intangible assets.

 

•

Operating expenses increased $2.9 billion or 25%, driven by LinkedIn expenses and investments in commercial sales capacity and cloud engineering. LinkedIn operating expenses increased $2.2 billion to $4.5 billion, including $617 million of amortization of acquired intangible assets.

 

•

Server products and cloud services revenue increased $4.5 billion or 21%, driven by Azure and server products licensed on-premises revenue growth. Azure revenue grew 91%, due to higher infrastructure-as-a-service and platform-as-a-service consumption-based and per user-based services. Server products licensed on-premises revenue increased 5%, mainly due to a higher mix of premium licenses for Windows Server and Microsoft SQL Server.

 

•

Enterprise Services revenue increased $304 million or 5%, driven by higher revenue from Premier Support Services and Microsoft Consulting Services, offset in part by a decline in revenue from custom support agreements.

 

•

Gross margin increased $3.1 billion or 16%, driven by growth in server products and cloud services revenue and cloud services scale and efficiencies. Gross margin percentage decreased, due to an increased mix of cloud offerings, offset in part by gross margin percentage improvement in Azure.

 

•

Operating expenses increased $683 million or 7%, driven by investments in commercial sales capacity and cloud engineering.

 

•

Windows revenue increased $925 million or 5%, driven by growth in Windows Commercial and Windows OEM, offset by a decline in patent licensing revenue. Windows Commercial revenue increased 12%, driven by multi-year agreement revenue growth. Windows OEM revenue increased 5%. Windows OEM Pro revenue grew 11%, ahead of a strengthening commercial PC market. Windows OEM non-Pro revenue declined 4%, below the consumer PC market, driven by continued pressure in the entry-level price category.

 

•

Gaming revenue increased $1.3 billion or 14%, driven by Xbox software and services revenue growth of 20%, mainly from third-party title strength.

 

•

Search advertising revenue increased $793 million or 13%. Search advertising revenue, excluding traffic acquisition costs, increased 16%, driven by growth in Bing, due to higher revenue per search and search volume.

 

•

Surface revenue increased $625 million or 16%, driven by a higher mix of premium devices and an increase in volumes sold, due to the latest editions of Surface.

 

•

Phone revenue decreased $525 million.

 

•

Gross margin increased $2.2 billion or 11%, driven by growth in Windows, Surface, Search, and Gaming. Gross margin percentage increased, primarily due to gross margin percentage improvement in Surface.

 

•

Operating expenses increased $391 million or 3%, driven by investments in Search, AI, and Gaming engineering and commercial sales capacity, offset in part by a decrease in Windows marketing expenses.

(In millions, except percentages)

 

2019

 

 

2018

 

 

2017

 

 

Percentage

Change 2019
Versus 2018

 

 

Percentage
Change 2018
Versus 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

16,876

 

 

$

14,726

 

 

$

  13,037

 

 

 

15%

 

 

 

13%

 

As a percent of revenue

 

 

13%

 

 

 

13%

 

 

 

13%

 

 

 

0ppt

 

 

 

0ppt

 

 

 

(In millions, except percentages)

 

2019

 

 

2018

 

 

2017

 

 

Percentage

Change 2019
Versus 2018

 

 

Percentage
Change 2018
Versus 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

18,213

 

 

$

17,469

 

 

$

15,461

 

 

 

4%

 

 

 

13%

 

As a percent of revenue

 

 

14%

 

 

 

16%

 

 

 

16%

 

 

 

(2)ppt

 

 

 

0ppt

 

 

 

(In millions, except percentages)

 

2019

 

 

2018

 

 

2017

 

 

Percentage

Change 2019
Versus 2018

 

 

Percentage
Change 2018
Versus 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

4,885

 

 

$

4,754

 

 

$

4,481

 

 

 

3%

 

 

 

6%

 

As a percent of revenue

 

 

4%

 

 

 

4%

 

 

 

5%

 

 

 

0ppt

 

 

 

(1)ppt

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2019

 

 

 

2018

 

 

 

2017

 

 

 

 

 

Interest and dividends income

 

$

2,762

 

 

$

2,214

 

 

$

1,387

 

Interest expense

 

 

(2,686

)

 

 

(2,733

)

 

 

(2,222

)

Net recognized gains on investments

 

 

648

 

 

 

2,399

 

 

 

2,583

 

Net gains (losses) on derivatives

 

 

144

 

 

 

(187

)

 

 

(510

)

Net losses on foreign currency remeasurements

 

 

(82

)

 

 

(218

)

 

 

(111

)

Other, net

 

 

(57

)

 

 

(59

)

 

 

(251

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

   729

 

 

$

   1,416

 

 

$

   876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except percentages and per share amounts)

 

2019

 

 

2018

 

 

2017

 

 

Percentage
Change 2019
Versus 2018

 

 

Percentage
Change 2018
Versus 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

42,959

 

 

$

35,058

 

 

$

29,025

 

 

 

23%

 

 

 

21%

 

Net tax impact of transfer of intangible properties

 

 

0

 

 

 

0

 

 

 

0

 

 

 

*

 

 

 

*

 

Net tax impact of the TCJA

 

 

0

 

 

 

0

 

 

 

0

 

 

 

*

 

 

 

*

 

Restructuring expenses

 

 

0

 

 

 

0

 

 

 

306

 

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP operating income

 

$

42,959

 

 

$

35,058

 

 

$

29,331

 

 

 

23%

 

 

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

39,240

 

 

$

16,571

 

 

$

25,489

 

 

 

137%

 

 

 

(35)%

 

Net tax impact of transfer of intangible properties

 

 

(2,567

)

 

 

0

 

 

 

0

 

 

 

*

 

 

 

*

 

Net tax impact of the TCJA

 

 

157

 

 

 

13,696

 

 

 

0

 

 

 

*

 

 

 

*

 

Restructuring expenses

 

 

0

 

 

 

0

 

 

 

243

 

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP net income

 

$

36,830

 

 

$

30,267

 

 

$

25,732

 

 

 

22%

 

 

 

18%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

5.06

 

 

$

2.13

 

 

$

3.25

 

 

 

138%

 

 

 

(34)%

 

Net tax impact of transfer of intangible properties

 

 

(0.33

)

 

 

0

 

 

 

0

 

 

 

*

 

 

 

*

 

Net tax impact of the TCJA

 

 

0.02

 

 

 

1.75

 

 

 

0

 

 

 

*

 

 

 

*

 

Restructuring expenses

 

 

0

 

 

 

0

 

 

 

0.04

 

 

 

*

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP diluted earnings per share

 

$

4.75

 

 

$

3.88

 

 

$

3.29

 

 

 

22%

 

 

 

18%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Not meaningful.

(In millions)

 

 

 

 

 

 

 

 

Three Months Ending,

 

 

 

 

 

 

September 30, 2019

 

$

12,353

 

December 31, 2019

 

 

9,807

 

March 31, 2020

 

 

6,887

 

June 30, 2020

 

 

3,629

 

Thereafter

 

 

4,530

 

 

 

 

 

Total

 

$

37,206

 

 

 

 

 

 

(In millions)

 

2020

 

 

2021-2022

 

 

2023-2024

 

 

Thereafter

 

 

Total

 

 

 

 

 

 

 

 

 

 

Long-term debt: (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments

 

$

5,518

 

 

$

11,744

 

 

$

8,000

 

 

$

47,519

 

 

$

72,781

 

Interest payments

 

 

2,299

 

 

 

4,309

 

 

 

3,818

 

 

 

29,383

 

 

 

39,809

 

Construction commitments (b)

 

 

3,443

 

 

 

515

 

 

 

0

 

 

 

0

 

 

 

3,958

 

Operating leases, including imputed interest (c)

 

 

1,790

 

 

 

3,144

 

 

 

2,413

 

 

 

3,645

 

 

 

10,992

 

Finance leases, including imputed interest (c)

 

 

797

 

 

 

2,008

 

 

 

2,165

 

 

 

9,872

 

 

 

14,842

 

Transition tax (d)

 

 

1,180

 

 

 

2,900

 

 

 

4,168

 

 

 

8,155

 

 

 

16,403

 

Purchase commitments (e)

 

 

17,478

 

 

 

1,185

 

 

 

159

 

 

 

339

 

 

 

19,161

 

Other long-term liabilities (f)

 

 

0

 

 

 

72

 

 

 

29

 

 

 

324

 

 

 

425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  32,505

 

 

$

25,877

 

 

$

20,752

 

 

$

  99,237

 

 

$

178,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Refer to Note 11 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

(b)

Refer to Note 7 – Property and Equipment of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

(c)

Refer to Note 15 – Leases of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

(d)

Refer to Note 12 – Income Taxes of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

(e)

Amounts represent purchase commitments, including open purchase orders and take-or-pay contracts that are not presented as construction commitments above.

(f)

We have excluded long-term tax contingencies, other tax liabilities, and deferred income taxes of $14.2 billion from the amounts presented as the timing of these obligations is uncertain. We have also excluded unearned revenue and non-cash items.

Satya Nadella

Chief Executive Officer

 

Amy E. Hood

Executive Vice President and Chief Financial Officer

 

Frank H. Brod

Corporate Vice President, Finance and Administration;
Chief Accounting Officer

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Categories

 

Hypothetical Change

 

June 30,

2019

 

 

 

 

Impact

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency - Revenue

 

10% decrease in foreign exchange rates

 

$

(3,402

)

 

 

 

Earnings

 

Foreign currency - Investments

 

10% decrease in foreign exchange rates

 

 

(120

)

 

 

 

Fair Value

 

Interest rate

 

100 basis point increase in U.S. treasury interest rates

 

 

(2,909

)

 

 

 

Fair Value

 

Credit

 

100 basis point increase in credit spreads

 

 

(224

)

 

 

 

Fair Value

 

Equity

 

10% decrease in equity market prices

 

 

(244

)

 

 

 

Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

66,069

 

 

$

  64,497

 

 

$

63,811

 

Service and other

 

 

59,774

 

 

 

45,863

 

 

 

32,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

125,843

 

 

 

110,360

 

 

 

96,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

16,273

 

 

 

15,420

 

 

 

15,175

 

Service and other

 

 

26,637

 

 

 

22,933

 

 

 

19,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

 

 

42,910

 

 

 

38,353

 

 

 

34,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

82,933

 

 

 

72,007

 

 

 

62,310

 

Research and development

 

 

16,876

 

 

 

14,726

 

 

 

13,037

 

Sales and marketing

 

 

18,213

 

 

 

17,469

 

 

 

15,461

 

General and administrative

 

 

4,885

 

 

 

4,754

 

 

 

4,481

 

Restructuring

 

 

0

 

 

 

0

 

 

 

306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

42,959

 

 

 

35,058

 

 

 

29,025

 

Other income, net

 

 

729

 

 

 

1,416

 

 

 

876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

43,688

 

 

 

36,474

 

 

 

29,901

 

Provision for income taxes

 

 

4,448

 

 

 

19,903

 

 

 

4,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

39,240

 

 

$

16,571

 

 

$

25,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

5.11

 

 

$

2.15

 

 

$

3.29

 

Diluted

 

$

5.06

 

 

$

2.13

 

 

$

3.25

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,673

 

 

 

7,700

 

 

 

7,746

 

Diluted

 

 

7,753

 

 

 

7,794

 

 

 

7,832

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Net income

 

$

39,240

 

 

$

16,571

 

 

$

25,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives

 

 

(173

)

 

 

39

 

 

 

(218

)

Net change related to investments

 

 

2,405

 

 

 

(2,717

)

 

 

(1,116

)

Translation adjustments and other

 

 

(318

)

 

 

(178

)

 

 

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

1,914

 

 

 

(2,856

) 

 

 

(1,167

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

41,154

 

 

$

13,715

 

 

$

24,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

2019

 

 

2018

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,356

 

 

$

11,946

 

Short-term investments

 

 

122,463

 

 

 

121,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

 

133,819

 

 

 

133,768

 

Accounts receivable, net of allowance for doubtful accounts of $411 and $377

 

 

29,524

 

 

 

26,481

 

Inventories

 

 

2,063

 

 

 

2,662

 

Other

 

 

10,146

 

 

 

6,751

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

175,552

 

 

 

169,662

 

Property and equipment, net of accumulated depreciation of $35,330 and $29,223

 

 

36,477

 

 

 

29,460

 

Operating lease right-of-use assets

 

 

7,379

 

 

 

6,686

 

Equity investments

 

 

2,649

 

 

 

1,862

 

Goodwill

 

 

42,026

 

 

 

35,683

 

Intangible assets, net

 

 

7,750

 

 

 

8,053

 

Other long-term assets

 

 

14,723

 

 

 

7,442

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

286,556

 

 

$

258,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,382

 

 

$

8,617

 

Current portion of long-term debt

 

 

5,516

 

 

 

3,998

 

Accrued compensation

 

 

6,830

 

 

 

6,103

 

Short-term income taxes

 

 

5,665

 

 

 

2,121

 

Short-term unearned revenue

 

 

32,676

 

 

 

28,905

 

Other

 

 

9,351

 

 

 

8,744

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

69,420

 

 

 

58,488

 

Long-term debt

 

 

66,662

 

 

 

72,242

 

Long-term income taxes

 

 

29,612

 

 

 

30,265

 

Long-term unearned revenue

 

 

4,530

 

 

 

3,815

 

Deferred income taxes

 

 

233

 

 

 

541

 

Operating lease liabilities

 

 

6,188

 

 

 

5,568

 

Other long-term liabilities

 

 

7,581

 

 

 

5,211

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

184,226

 

 

 

176,130

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000; outstanding 7,643 and 7,677

 

 

78,520

 

 

 

71,223

 

Retained earnings

 

 

24,150

 

 

 

13,682

 

Accumulated other comprehensive loss

 

 

(340

)

 

 

(2,187

) 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

102,330

 

 

 

82,718

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

286,556

 

 

$

258,848

 

 

 

 

 

 

 

 

 

 

 (In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

39,240

 

 

$

16,571

 

 

$

25,489

 

Adjustments to reconcile net income to net cash from operations:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization, and other

 

 

11,682

 

 

 

10,261

 

 

 

8,778

 

Stock-based compensation expense

 

 

4,652

 

 

 

3,940

 

 

 

3,266

 

Net recognized gains on investments and derivatives

 

 

(792

)

 

 

(2,212

)

 

 

(2,073

)

Deferred income taxes

 

 

(6,463

)

 

 

(5,143

)

 

 

(829

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,812

)

 

 

(3,862

)

 

 

(1,216

)

Inventories

 

 

597

 

 

 

(465

)

 

 

50

 

Other current assets

 

 

(1,718

)

 

 

(952

)

 

 

1,028

 

Other long-term assets

 

 

(1,834

)

 

 

(285

)

 

 

(917

)

Accounts payable

 

 

232

 

 

 

1,148

 

 

 

81

 

Unearned revenue

 

 

4,462

 

 

 

5,922

 

 

 

3,820

 

Income taxes

 

 

2,929

 

 

 

18,183

 

 

 

1,792

 

Other current liabilities

 

 

1,419

 

 

 

798

 

 

 

356

 

Other long-term liabilities

 

 

591

 

 

 

(20

)

 

 

(118

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

 

 

52,185

 

 

 

43,884

 

 

 

39,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of short-term debt, maturities of 90 days or less, net

 

 

0

 

 

 

(7,324

)

 

 

(4,963

)

Proceeds from issuance of debt

 

 

0

 

 

 

7,183

 

 

 

44,344

 

Repayments of debt

 

 

(4,000

)

 

 

(10,060

)

 

 

(7,922

)

Common stock issued

 

 

1,142

 

 

 

1,002

 

 

 

772

 

Common stock repurchased

 

 

(19,543

)

 

 

(10,721

)

 

 

(11,788

)

Common stock cash dividends paid

 

 

(13,811

)

 

 

(12,699

)

 

 

(11,845

)

Other, net

 

 

(675

)

 

 

(971

)

 

 

(190

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from (used in) financing

 

 

(36,887

)

 

 

(33,590

)

 

 

8,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(13,925

)

 

 

(11,632

)

 

 

(8,129

)

Acquisition of companies, net of cash acquired, and purchases of intangible and other assets

 

 

(2,388

)

 

 

(888

)

 

 

(25,944

)

Purchases of investments

 

 

(57,697

)

 

 

(137,380

)

 

 

(176,905

)

Maturities of investments

 

 

20,043

 

 

 

26,360

 

 

 

28,044

 

Sales of investments

 

 

38,194

 

 

 

117,577

 

 

 

136,350

 

Securities lending payable

 

 

0

 

 

 

(98

)

 

 

(197

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing

 

 

(15,773

)

 

 

(6,061

)

 

 

  (46,781

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

 

 

(115

)

 

 

50

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(590

)

 

 

4,283

 

 

 

1,153

 

Cash and cash equivalents, beginning of period

 

 

11,946

 

 

 

7,663

 

 

 

6,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

11,356

 

 

$

11,946

 

 

$

7,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Common stock and paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

71,223

 

 

$

69,315

 

 

$

68,178

 

Common stock issued

 

 

6,829

 

 

 

1,002

 

 

 

772

 

Common stock repurchased

 

 

(4,195

)

 

 

(3,033

)

 

 

(2,987

)

Stock-based compensation expense

 

 

4,652

 

 

 

3,940

 

 

 

3,266

 

Other, net

 

 

11

 

 

 

(1

) 

 

 

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

78,520

 

 

 

71,223

 

 

 

69,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

13,682

 

 

 

17,769

 

 

 

13,118

 

Net income

 

 

39,240

 

 

 

16,571

 

 

 

25,489

 

Common stock cash dividends

 

 

(14,103

)

 

 

(12,917

)

 

 

(12,040

)

Common stock repurchased

 

 

(15,346

)

 

 

(7,699

)

 

 

(8,798

)

Cumulative effect of accounting changes

 

 

677

 

 

 

(42

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

24,150

 

 

 

13,682

 

 

 

17,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

(2,187

) 

 

 

627

 

 

 

1,794

 

Other comprehensive income (loss)

 

 

1,914

 

 

 

(2,856

) 

 

 

(1,167

)

Cumulative effect of accounting changes

 

 

(67

)

 

 

42

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

(340

) 

 

 

(2,187

)

 

 

627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

  102,330

 

 

$

  82,718

 

 

$

  87,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

1.84

 

 

$

1.68

 

 

$

1.56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2019

 

 

 

 

2018

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

397

 

 

 

$

361

 

 

$

409

 

Charged to costs and other

 

 

153

 

 

 

 

134

 

 

 

58

 

Write-offs

 

 

(116

) 

 

 

 

(98

)

 

 

(106

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

434

 

 

 

$

  397

 

 

$

  361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

2019

 

 

 

2018

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

$

411

 

 

$

377

 

 

$

345

 

Other long-term assets

 

 

23

 

 

 

20

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  434

 

 

$

  397

 

 

$

  361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. Our Level 1 investments include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

 

•

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. Our Level 2 investments include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

 

•

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in corporate notes and bonds, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

(In millions, except earnings per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders (A)

 

$

  39,240

 

 

$

  16,571

 

 

$

  25,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock (B)

 

 

7,673

 

 

 

7,700

 

 

 

7,746

 

Dilutive effect of stock-based awards

 

 

80

 

 

 

94

 

 

 

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents (C)

 

 

  7,753

 

 

 

  7,794

 

 

 

  7,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

5.11

 

 

$

2.15

 

 

$

3.29

 

Diluted (A/C)

 

$

5.06

 

 

$

2.13

 

 

$

3.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Interest and dividends income

 

$

2,762

 

 

$

2,214

 

 

$

1,387

 

Interest expense

 

 

  (2,686

)

 

 

  (2,733

)

 

 

  (2,222

)

Net recognized gains on investments

 

 

648

 

 

 

2,399

 

 

 

2,583

 

Net gains (losses) on derivatives

 

 

144

 

 

 

(187

)

 

 

(510

)

Net losses on foreign currency remeasurements

 

 

(82

)

 

 

(218

)

 

 

(111

)

Other, net

 

 

(57

)

 

 

(59

)

 

 

(251

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

729

 

 

$

1,416

 

 

$

876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Realized gains from sales of available-for-sale securities

 

$

12

 

 

$

27

 

 

$

108

 

Realized losses from sales of available-for-sale securities

 

 

(93

)

 

 

(987

)

 

 

(162

)

Other-than-temporary impairments of investments

 

 

(16

)

 

 

(6

)

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(97

)

 

$

(966

)

 

$

  (68

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Net realized gains on investments sold

 

$

276

 

 

$

3,406

 

 

$

2,692

 

Net unrealized gains on investments still held

 

 

  479

 

 

 

0

 

 

 

0

 

Impairments of investments

 

 

(10

) 

 

 

(41

) 

 

 

(41

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  745

 

 

$

  3,365

 

 

$

2,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Fair Value Level

 

 

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Recorded

Basis

 

 

Cash

and Cash Equivalents

 

Short-term

Investments

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

Level 2

 

 

$

2,211

 

 

$

0

 

 

$

0

 

 

$

2,211

 

 

$

1,773

 

 

$

438

 

 

$

0

 

Certificates of deposit

 

 

Level 2

 

 

 

2,018

 

 

 

0

 

 

 

0

 

 

 

2,018

 

 

 

1,430

 

 

 

588

 

 

 

0

 

U.S. government securities

 

 

Level 1

 

 

 

104,925

 

 

 

1,854

 

 

 

(104

)

 

 

106,675

 

 

 

769

 

 

 

105,906

 

 

 

0

 

U.S. agency securities

 

 

Level 2

 

 

 

988

 

 

 

0

 

 

 

0

 

 

 

988

 

 

 

698

 

 

 

290

 

 

 

0

 

Foreign government bonds

 

 

Level 2

 

 

 

6,350

 

 

 

4

 

 

 

(8

)

 

 

6,346

 

 

 

2,506

 

 

 

3,840

 

 

 

0

 

Mortgage- and asset-backed securities

 

 

Level 2

 

 

 

3,554

 

 

 

10

 

 

 

(3

)

 

 

3,561

 

 

 

0

 

 

 

3,561

 

 

 

0

 

Corporate notes and bonds

 

 

Level 2

 

 

 

7,437

 

 

 

111

 

 

 

(7

)

 

 

7,541

 

 

 

0

 

 

 

7,541

 

 

 

0

 

Corporate notes and bonds

 

 

Level 3

 

 

 

15

 

 

 

0

 

 

 

0

 

 

 

15

 

 

 

0

 

 

 

15

 

 

 

0

 

Municipal securities

 

 

Level 2

 

 

 

242

 

 

 

48

 

 

 

0

 

 

 

290

 

 

 

0

 

 

 

290

 

 

 

0

 

Municipal securities

 

 

Level 3

 

 

 

7

 

 

 

0

 

 

 

0

 

 

 

7

 

 

 

0

 

 

 

7

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

 

$

127,747

 

 

$

2,027

 

 

$

(122

)

 

$

129,652

 

 

$

7,176

 

 

$

122,476

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

973

 

 

$

409

 

 

$

0

 

 

$

564

 

Equity investments

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,085

 

 

 

0

 

 

 

0

 

 

 

2,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,058

 

 

$

409

 

 

$

0

 

 

$

2,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,771

 

 

$

3,771

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

0

 

 

 

(13

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

136,468

 

 

$

  11,356

 

 

$

122,463

 

 

$

  2,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Fair Value Level

 

 

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Recorded

Basis

 

 

Cash

and Cash

Equivalents

 

 

Short-term

Investments

 

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

Level 2

 

 

$

2,513

 

 

$

0

 

 

$

0

 

 

$

2,513

 

 

$

2,215

 

 

$

298

 

 

$

0

 

Certificates of deposit

 

 

Level 2

 

 

 

2,058

 

 

 

0

 

 

 

0

 

 

 

2,058

 

 

 

1,865

 

 

 

193

 

 

 

0

 

U.S. government securities

 

 

Level 1

 

 

 

108,120

 

 

 

62

 

 

 

(1,167

)

 

 

107,015

 

 

 

2,280

 

 

 

104,735

 

 

 

0

 

U.S. agency securities

 

 

Level 2

 

 

 

1,742

 

 

 

0

 

 

 

0

 

 

 

1,742

 

 

 

1,398

 

 

 

344

 

 

 

0

 

Foreign government bonds

 

 

Level 1

 

 

 

22

 

 

 

0

 

 

 

0

 

 

 

22

 

 

 

0

 

 

 

22

 

 

 

0

 

Foreign government bonds

 

 

Level 2

 

 

 

5,063

 

 

 

1

 

 

 

(10

)

 

 

5,054

 

 

 

0

 

 

 

5,054

 

 

 

0

 

Mortgage- and asset-backed securities

 

 

Level 2

 

 

 

3,864

 

 

 

4

 

 

 

(13

)

 

 

3,855

 

 

 

0

 

 

 

3,855

 

 

 

0

 

Corporate notes and bonds

 

 

Level 2

 

 

 

6,929

 

 

 

21

 

 

 

(56

)

 

 

6,894

 

 

 

0

 

 

 

6,894

 

 

 

0

 

Corporate notes and bonds

 

 

Level 3

 

 

 

15

 

 

 

0

 

 

 

0

 

 

 

15

 

 

 

0

 

 

 

15

 

 

 

0

 

Municipal securities

 

 

Level 2

 

 

 

271

 

 

 

37

 

 

 

(1

)

 

 

307

 

 

 

0

 

 

 

307

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

 

$

130,597

 

 

$

125

 

 

$

(1,247

)

 

$

129,475

 

 

$

7,758

 

 

$

121,717

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

533

 

 

$

246

 

 

$

0

 

 

$

287

 

Equity investments

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

0

 

 

 

0

 

 

 

18

 

Equity investments

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,558

 

 

 

0

 

 

 

1

 

 

 

1,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,109

 

 

$

246

 

 

$

1

 

 

$

1,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,942

 

 

$

3,942

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

104

 

 

 

0

 

 

 

104

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

135,630

 

 

$

  11,946

 

 

$

121,822

 

 

$

  1,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

 

 

 

Total
Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Fair Value

 

 

Unrealized
Losses

 

 

Fair Value

 

 

Unrealized
Losses

 

 

Total
Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

1,491

 

 

$

(1

)

 

$

39,158

 

 

$

(103

)

 

$

40,649

 

 

$

(104

)

Foreign government bonds

 

 

25

 

 

 

0

 

 

 

77

 

 

 

(8

)

 

 

102

 

 

 

(8

)

Mortgage- and asset-backed securities

 

 

664

 

 

 

(1

)

 

 

378

 

 

 

(2

)

 

 

1,042

 

 

 

(3

)

Corporate notes and bonds

 

 

498

 

 

 

(3

)

 

 

376

 

 

 

(4

)

 

 

874

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,678

 

 

$

  (5

)

 

$

39,989

 

 

$

  (117

)

 

$

 42,667

 

 

$

  (122

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

 

 

 

 

Total

Unrealized

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Total

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

82,352

 

 

$

(1,064

)

 

$

4,459

 

 

$

(103

)

 

$

86,811

 

 

$

(1,167

)

Foreign government bonds

 

 

3,457

 

 

 

(7

)

 

 

13

 

 

 

(3

)

 

 

3,470

 

 

 

(10

)

Mortgage- and asset-backed securities

 

 

2,072

 

 

 

(9

)

 

 

96

 

 

 

(4

)

 

 

2,168

 

 

 

(13

)

Corporate notes and bonds

 

 

3,111

 

 

 

(43

)

 

 

301

 

 

 

(13

)

 

 

3,412

 

 

 

(56

)

Municipal securities

 

 

45

 

 

 

(1

)

 

 

0

 

 

 

0

 

 

 

45

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

91,037

 

 

$

(1,124

)

 

$

  4,869

 

 

$

  (123

)

 

$

 95,906

 

 

$

(1,247

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Cost Basis

 

 

Estimated

Fair Value

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

53,200

 

 

$

53,124

 

Due after one year through five years

 

 

47,016

 

 

 

47,783

 

Due after five years through 10 years

 

 

26,658

 

 

 

27,824

 

Due after 10 years

 

 

873

 

 

 

921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  127,747

 

 

$

  129,652

 

 

 

 

 

 

 

 

 

 

(In millions)

 

June 30,

2019

 

 

June 30,

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts sold

 

$

6,034

 

 

$

11,101

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts purchased

 

 

14,889

 

 

 

9,425

 

Foreign exchange contracts sold

 

 

15,614

 

 

 

13,374

 

Equity contracts purchased

 

 

680

 

 

 

49

 

Equity contracts sold

 

 

5

 

 

 

5

 

Other contracts purchased

 

 

1,327

 

 

 

878

 

Other contracts sold

 

 

451

 

 

 

472

 

 

 

 

 

 

 

 

 

 

 

 

Derivative

 

Derivative

 

Derivative

 

Derivative

 

(In millions)

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

2019

 

June 30,

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

0

 

 

$

0

 

 

$

174

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

0

 

 

 

(93

)

 

 

95

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

204

 

 

 

(172

)

 

 

256

 

 

 

(197

)

Equity contracts

 

 

38

 

 

 

0

 

 

 

2

 

 

 

(7

)

Other contracts

 

 

8

 

 

 

(7

)

 

 

11

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross amounts of derivatives

 

 

  250

 

 

 

(272

)

 

 

  538

 

 

 

(207

)

Gross amounts of derivatives offset in the balance sheet

 

 

(113

)

 

 

114

 

 

 

(152

)

 

 

153

 

Cash collateral received

 

 

0

 

 

 

(78

) 

 

 

0

 

 

 

(235

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amounts of derivatives

 

$

  137

 

 

$

(236

) 

 

$

386

 

 

$

(289

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

(13

)

 

$

0

 

 

$

104

 

 

$

0

 

Other current assets

 

 

146

 

 

 

0

 

 

 

260

 

 

 

0

 

Other long-term assets

 

 

4

 

 

 

0

 

 

 

22

 

 

 

0

 

Other current liabilities

 

 

0

 

 

 

(221

)

 

 

0

 

 

 

(288

)

Other long-term liabilities

 

 

0

 

 

 

(15

)

 

 

0

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

137

 

 

$

(236

)

 

$

386

 

 

$

(289

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Level 1

 

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

0

 

 

$

247

 

 

$

3

 

 

$

250

 

Derivative liabilities

 

 

0

 

 

 

(272

)

 

 

0

 

 

 

(272

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

1

 

 

 

535

 

 

 

2

 

 

 

538

 

Derivative liabilities

 

 

(1

)

 

 

(206

)

 

 

0

 

 

 

(207

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Foreign Exchange Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

  38

 

 

$

  25

 

 

$

  441

 

Hedged items

 

 

  130

 

 

 

  78

 

 

 

  (386

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amount of ineffectiveness

 

$

168

 

 

$

103

 

 

$

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

 

$

0

 

 

$

(324

)

 

$

(74

)

Hedged items

 

 

0

 

 

 

324

 

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amount of ineffectiveness

 

$

0

 

 

$

0

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of equity contracts excluded from effectiveness assessment

 

$

  0

 

 

$

  80

 

 

$

  (80

)

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Effective Portion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains recognized in other comprehensive income (loss), net of tax of $1, $11, and $4

 

$

159

 

 

$

219

 

 

$

328

 

Gains reclassified from accumulated other comprehensive income (loss) into revenue

 

 

341

 

 

 

185

 

 

 

555

 

 

 

 

 

Amount Excluded from Effectiveness Assessment and Ineffective Portion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses recognized in other income (expense), net

 

 

  (64

)

 

 

  (255

)

 

 

  (389

)

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Foreign exchange contracts

 

$

(97

)

 

$

(33

)

 

$

(117

)

Equity contracts

 

 

3

 

 

 

(87

)

 

 

(114

)

Other contracts

 

 

35

 

 

 

(17

)

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  (59

)

 

$

  (137

)

 

$

  (234

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

June 30,

 

2019

 

 

2018

 

 

 

 

Raw materials

 

$

399

 

 

$

655

 

Work in process

 

 

53

 

 

 

54

 

Finished goods

 

 

1,611

 

 

 

1,953

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,063

 

 

$

  2,662

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

June 30,

 

2019

 

 

2018

 

 

 

 

Land

 

$

1,540

 

 

$

1,254

 

Buildings and improvements

 

 

26,288

 

 

 

20,604

 

Leasehold improvements

 

 

5,316

 

 

 

4,735

 

Computer equipment and software

 

 

33,823

 

 

 

27,633

 

Furniture and equipment

 

 

4,840

 

 

 

4,457

 

 

 

 

 

 

 

 

 

 

 

 

 

Total, at cost

 

 

71,807

 

 

 

58,683

 

Accumulated depreciation

 

 

(35,330

)

 

 

(29,223

)

 

 

 

 

 

 

 

 

 

 

 

 

Total, net

 

$

  36,477

 

 

$

  29,460

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and short-term investments

 

$

234

 

Goodwill 

 

 

5,497

 

Intangible assets

 

 

1,267

 

Other assets

 

 

143

 

Other liabilities

 

 

(217

)

 

 

 

 

 

 

 

 

 

 

Total

 

$

  6,924

 

 

 

 

 

 

(In millions)

 

Amount

 

 

Weighted

Average Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer-related

 

$

  648

 

 

 

8 years

 

Technology-based

 

 

447

 

 

 

5 years

 

Marketing-related

 

 

170

 

 

 

10 years

 

Contract-based

 

 

2

 

 

 

2 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,267

 

 

 

7 years

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,328

 

Short-term investments

 

 

2,110

 

Other current assets

 

 

697

 

Property and equipment

 

 

1,529

 

Intangible assets

 

 

7,887

 

Goodwill (a)

 

 

16,803

 

Short-term debt (b)

 

 

(1,323

)

Other current liabilities

 

 

(1,117

)

Deferred income taxes

 

 

(774

)

Other

 

 

(131

)

 

 

 

 

 

 

 

 

 

 

Total purchase price

 

$

  27,009

 

 

 

 

 

 

(a)

Goodwill was assigned to our Productivity and Business Processes segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of LinkedIn. None of the goodwill is expected to be deductible for income tax purposes.

(b)

Convertible senior notes issued by LinkedIn on November 12, 2014, substantially all of which were redeemed after our acquisition of LinkedIn. The remaining $18 million of notes are not redeemable and are included in long-term debt in our consolidated balance sheets. Refer to Note 11 – Debt for further information.

(In millions)

 

Amount

 

 

Weighted

Average Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer-related

 

$

  3,607

 

 

 

7 years

 

Marketing-related (trade names)

 

 

2,148

 

 

 

20 years

 

Technology-based

 

 

2,109

 

 

 

3 years

 

Contract-based

 

 

23

 

 

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of intangible assets acquired

 

$

7,887

 

 

 

9 years

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

 

2017

 

 

 

 

 

 

 

Revenue

 

 

$

  2,271

 

Operating loss

 

 

 

(924

)

 

 

 

 

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

  98,291

 

 

$

  94,490

 

Net income

 

 

25,179

 

 

 

19,128

 

Diluted earnings per share

 

 

3.21

 

 

 

2.38

 

 

 

 

 

 

 

 

 

 

(In millions)

 

June 30,

2017

 

Acquisitions

 

Other

 

June 30,

2018

 

Acquisitions

 

Other

 

June 30,
2019

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

 

$

23,739

 

 

$

72

 

 

$

12

 

 

$

23,823

 

 

$

514

 

 

$

(60

)

 

$

24,277

 

Intelligent Cloud

 

 

 

5,555

 

 

 

164

 

 

 

(16

)

 

 

5,703

 

 

 

5,605

(a)

 

 

43

(a)

 

 

11,351

 

More Personal Computing

 

 

 

5,828

 

 

 

394

 

 

 

(65

)

 

 

6,157

 

 

 

289

 

 

 

(48

)

 

 

6,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

  35,122

 

 

$

  630

 

 

$

  (69

)

 

$

  35,683

 

 

$

  6,408

 

 

$

(65

)

 

$

  42,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes goodwill of $5.5 billion related to GitHub. See Note 8 – Business Combinations for further information.

(In millions)

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Carrying
Amount

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net Carrying
Amount

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

Technology-based

 

$

7,691

 

 

$

(5,771

)

 

$

1,920

 

 

$

7,220

 

 

$

(5,018

)

 

$

2,202

 

Customer-related

 

 

4,709

 

 

 

(1,785

)

 

 

2,924

 

 

 

4,031

 

 

 

(1,205

)

 

 

2,826

 

Marketing-related

 

 

4,165

 

 

 

(1,327

)

 

 

2,838

 

 

 

4,006

 

 

 

(1,071

)

 

 

2,935

 

Contract-based

 

 

574

 

 

 

(506

)

 

 

68

 

 

 

679

 

 

 

(589

)

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  17,139

(a)

 

$

  (9,389

)

 

$

7,750

 

 

$

  15,936

 

 

$

  (7,883

)

 

$

8,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes intangible assets of $1.3 billion related to GitHub. See Note 8 – Business Combinations for further information.  

(In millions)

 

Amount

 

 

Weighted

Average Life

 

 

Amount

 

 

Weighted

Average Life

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

Technology-based

 

$

814

 

 

 

5 years

 

 

$

178

 

 

 

4 years

 

Marketing-related

 

 

177

 

 

 

10 years

 

 

 

14

 

 

 

5 years

 

Contract-based

 

 

7

 

 

 

3 years

 

 

 

14

 

 

 

4 years

 

Customer-related

 

 

710

 

 

 

8 years

 

 

 

13

 

 

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

 1,708

 

 

 

7 years

 

 

$

  219

 

 

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

2020

 

$

1,488

 

2021

 

 

1,282

 

2022

 

 

1,187

 

2023

 

 

1,053

 

2024

 

 

737

 

Thereafter

 

 

2,003

 

 

 

 

 

 

 

 

Total

 

$

7,750

 

 

 

 

 

 

(In millions, except interest rates)

 

Face Value
June 30,

2019

 

 

Face Value
June 30,

2018

 

 

 

Stated

Interest

Rate

 

 

 

Effective

Interest

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 3, 2018

 

$

0

 

 

$

1,750

 

 

 

1.300%

 

 

 

1.396%

 

December 6, 2018

 

 

0

 

 

 

1,250

 

 

 

1.625%

 

 

 

1.824%

 

June 1, 2019

 

 

0

 

 

 

1,000

 

 

 

4.200%

 

 

 

4.379%

 

August 8, 2019

 

 

2,500

 

 

 

2,500

 

 

 

1.100%

 

 

 

1.203%

 

November 1, 2019

 

 

18

 

 

 

18

 

 

 

0.500%

 

 

 

0.500%

 

February 6, 2020

 

 

1,500

 

 

 

1,500

 

 

 

1.850%

 

 

 

1.952%

 

February 12, 2020

 

 

1,500

 

 

 

1,500

 

 

 

1.850%

 

 

 

1.935%

 

October 1, 2020

 

 

1,000

 

 

 

1,000

 

 

 

3.000%

 

 

 

3.137%

 

November 3, 2020

 

 

2,250

 

 

 

2,250

 

 

 

2.000%

 

 

 

2.093%

 

February 8, 2021

 

 

500

 

 

 

500

 

 

 

4.000%

 

 

 

4.082%

 

August 8, 2021

 

 

2,750

 

 

 

2,750

 

 

 

1.550%

 

 

 

1.642%

 

December 6, 2021 (a)

 

 

1,994

 

 

 

2,044

 

 

 

2.125%

 

 

 

2.233%

 

February 6, 2022

 

 

1,750

 

 

 

1,750

 

 

 

2.400%

 

 

 

2.520%

 

February 12, 2022

 

 

1,500

 

 

 

1,500

 

 

 

2.375%

 

 

 

2.466%

 

November 3, 2022

 

 

1,000

 

 

 

1,000

 

 

 

2.650%

 

 

 

2.717%

 

November 15, 2022

 

 

750

 

 

 

750

 

 

 

2.125%

 

 

 

2.239%

 

May 1, 2023

 

 

1,000

 

 

 

1,000

 

 

 

2.375%

 

 

 

2.465%

 

August 8, 2023

 

 

1,500

 

 

 

1,500

 

 

 

2.000%

 

 

 

2.101%

 

December 15, 2023

 

 

1,500

 

 

 

1,500

 

 

 

3.625%

 

 

 

3.726%

 

February 6, 2024

 

 

2,250

 

 

 

2,250

 

 

 

2.875%

 

 

 

3.041%

 

February 12, 2025

 

 

2,250

 

 

 

2,250

 

 

 

2.700%

 

 

 

2.772%

 

November 3, 2025

 

 

3,000

 

 

 

3,000

 

 

 

3.125%

 

 

 

3.176%

 

August 8, 2026

 

 

4,000

 

 

 

4,000

 

 

 

2.400%

 

 

 

 2.464%

 

February 6, 2027

 

 

4,000

 

 

 

4,000

 

 

 

3.300%

 

 

 

3.383%

 

December 6, 2028 (a)

 

 

1,993

 

 

 

2,044

 

 

 

3.125%

 

 

 

3.218%

 

May 2, 2033 (a)

 

 

626

 

 

 

642

 

 

 

2.625%

 

 

 

2.690%

 

February 12, 2035

 

 

1,500

 

 

 

1,500

 

 

 

3.500%

 

 

 

3.604%

 

November 3, 2035

 

 

1,000

 

 

 

1,000

 

 

 

4.200%

 

 

 

4.260%

 

August 8, 2036

 

 

2,250

 

 

 

2,250

 

 

 

3.450%

 

 

 

 3.510%

 

February 6, 2037

 

 

2,500

 

 

 

2,500

 

 

 

4.100%

 

 

 

4.152%

 

June 1, 2039

 

 

750

 

 

 

750

 

 

 

5.200%

 

 

 

5.240%

 

October 1, 2040

 

 

1,000

 

 

 

1,000

 

 

 

4.500%

 

 

 

4.567%

 

February 8, 2041

 

 

1,000

 

 

 

1,000

 

 

 

5.300%

 

 

 

5.361%

 

November 15, 2042

 

 

900

 

 

 

900

 

 

 

3.500%

 

 

 

3.571%

 

May 1, 2043

 

 

500

 

 

 

500

 

 

 

3.750%

 

 

 

3.829%

 

December 15, 2043

 

 

500

 

 

 

500

 

 

 

4.875%

 

 

 

4.918%

 

February 12, 2045

 

 

1,750

 

 

 

1,750

 

 

 

3.750%

 

 

 

3.800%

 

November 3, 2045

 

 

3,000

 

 

 

3,000

 

 

 

4.450%

 

 

 

4.492%

 

August 8, 2046

 

 

4,500

 

 

 

4,500

 

 

 

3.700%

 

 

 

3.743%

 

February 6, 2047

 

 

3,000

 

 

 

3,000

 

 

 

4.250%

 

 

 

4.287%

 

February 12, 2055

 

 

2,250

 

 

 

2,250

 

 

 

4.000%

 

 

 

4.063%

 

November 3, 2055

 

 

1,000

 

 

 

1,000

 

 

 

4.750%

 

 

 

4.782%

 

August 8, 2056

 

 

2,250

 

 

 

2,250

 

 

 

3.950%

 

 

 

 4.033%

 

February 6, 2057

 

 

2,000

 

 

 

2,000

 

 

 

4.500%

 

 

 

4.528%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

72,781

 

 

$

76,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Euro-denominated debt securities.

(In millions)

 

 

 

 

 

 

 

 

Year Ending June 30,

 

 

 

 

 

 

2020

 

$

5,518

 

2021

 

 

3,750

 

2022

 

 

7,994

 

2023

 

 

2,750

 

2024

 

 

5,250

 

Thereafter

 

 

47,519

 

 

 

 

 

Total

 

$

  72,781

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Current Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

4,718

 

 

$

19,764

 

 

$

2,739

 

U.S. state and local

 

 

662

 

 

 

934

 

 

 

30

 

Foreign

 

 

5,531

 

 

 

4,348

 

 

 

2,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current taxes

 

$

10,911

 

 

$

25,046

 

 

$

5,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

(5,647

)

 

$

(4,292

)

 

$

(554

)

U.S. state and local

 

 

(1,010

)

 

 

(458

)

 

 

269

 

Foreign

 

 

194

 

 

 

(393

)

 

 

(544

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes

 

$

(6,463

)

 

$

(5,143

)

 

$

(829

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

  4,448

 

 

$

  19,903

 

 

$

  4,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

U.S.

 

$

15,799

 

 

$

11,527

 

 

$

6,843

 

Foreign

 

 

27,889

 

 

 

24,947

 

 

 

23,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

  43,688

 

 

$

36,474

 

 

$

  29,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Federal statutory rate

 

 

21.0%

 

 

 

28.1%

 

 

 

35.0%

 

Effect of:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign earnings taxed at lower rates

 

 

(4.1)%

 

 

 

(7.8)%

 

 

 

(11.6)%

 

Impact of the enactment of the TCJA

 

 

0.4%

 

 

 

37.7%

 

 

 

0%

 

Phone business losses

 

 

0%

 

 

 

0%

 

 

 

(5.7)%

 

Impact of intangible property transfers

 

 

(5.9)%

 

 

 

0%

 

 

 

0%

 

Foreign-derived intangible income deduction

 

 

(1.4)%

 

 

 

0%

 

 

 

0%

 

Research and development credit

 

 

(1.1)%

 

 

 

(1.3)%

 

 

 

(0.9)%

 

Excess tax benefits relating to stock-based compensation

 

 

(2.2)%

 

 

 

(2.5)%

 

 

 

(2.1)%

 

Interest, net

 

 

1.0%

 

 

 

1.2%

 

 

 

1.4%

 

Other reconciling items, net

 

 

2.5%

 

 

 

(0.8)%

 

 

 

(1.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective rate

 

 

10.2%

 

 

 

54.6%

 

 

 

14.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

2019

 

 

2018

 

 

 

 

Deferred Income Tax Assets

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

406

 

 

$

460

 

Accruals, reserves, and other expenses

 

 

2,287

 

 

 

1,832

 

Loss and credit carryforwards

 

 

3,518

 

 

 

3,369

 

Depreciation and amortization

 

 

7,046

 

 

 

351

 

Leasing liabilities

 

 

1,594

 

 

 

1,427

 

Unearned revenue

 

 

475

 

 

 

0

 

Other

 

 

367

 

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax assets

 

 

15,693

 

 

 

7,495

 

Less valuation allowance

 

 

  (3,214

)

 

 

  (3,186

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax assets, net of valuation allowance

 

$

12,479

 

 

$

4,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Income Tax Liabilities

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments and debt

 

$

(738

)

 

$

0

 

Unearned revenue

 

 

(30

)

 

 

(639

)

Depreciation and amortization

 

 

0

 

 

 

(1,164

)

Leasing assets

 

 

(1,510

)

 

 

(1,366

)

Deferred GILTI tax liabilities

 

 

(2,607

)

 

 

(61

)

Other

 

 

(291

)

 

 

(251

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income tax liabilities

 

$

(5,176

)

 

$

(3,481

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred income tax assets (liabilities)

 

$

7,303

 

 

$

828

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported As

 

 

 

 

 

 

 

 

 

 

 

Other long-term assets

 

$

7,536

 

 

$

1,369

 

Long-term deferred income tax liabilities

 

 

(233

)

 

 

(541

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred income tax assets (liabilities)

 

$

7,303

 

 

$

828

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Beginning unrecognized tax benefits

 

$

11,961

 

 

$

11,737

 

 

$

10,164

 

Decreases related to settlements

 

 

(316

)

 

 

(193

)

 

 

(4

)

Increases for tax positions related to the current year

 

 

2,106

 

 

 

1,445

 

 

 

1,277

 

Increases for tax positions related to prior years

 

 

508

 

 

 

151

 

 

 

397

 

Decreases for tax positions related to prior years

 

 

(1,113

)

 

 

(1,176

)

 

 

(49

)

Decreases due to lapsed statutes of limitations

 

 

0

 

 

 

(3

)

 

 

(48

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending unrecognized tax benefits

 

$

  13,146

 

 

$

  11,961

 

 

$

  11,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

2019

 

 

2018

 

 

 

 

Productivity and Business Processes

 

$

16,831

 

 

$

14,864

 

Intelligent Cloud

 

 

16,988

 

 

 

14,706

 

More Personal Computing

 

 

3,387

 

 

 

3,150

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

37,206

 

 

$

32,720

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30, 2019

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

$

32,720

 

Deferral of revenue

 

 

 

69,493

 

Recognition of unearned revenue

 

 

 

(65,007

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

$

37,206

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

 

2018

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

1,707

 

 

$

1,585

 

 

$

1,412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

370

 

 

$

243

 

 

$

104

 

Interest on lease liabilities

 

 

247

 

 

 

175

 

 

 

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease cost

 

$

617

 

 

$

418

 

 

$

172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

 

2018

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

1,670

 

 

$

1,522

 

 

$

1,157

 

Operating cash flows from finance leases

 

 

247

 

 

 

175

 

 

 

68

 

Financing cash flows from finance leases

 

 

221

 

 

 

144

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

2,303

 

 

 

1,571

 

 

 

1,270

 

Finance leases

 

 

2,532

 

 

 

1,933

 

 

 

1,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except lease term and discount rate)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 June 30,

 

2019

 

 

2018

 

 

 

 

Operating Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

7,379

 

 

$

6,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

1,515

 

 

$

1,399

 

Operating lease liabilities

 

 

6,188

 

 

 

5,568

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating lease liabilities

 

$

7,703

 

 

$

6,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, at cost

 

$

7,041

 

 

$

4,543

 

Accumulated depreciation

 

 

(774

)

 

 

(404

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

6,267

 

 

$

4,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

$

317

 

 

$

176

 

Other long-term liabilities

 

 

6,257

 

 

 

4,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease liabilities

 

$

6,574

 

 

$

4,301

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

7 years

 

 

 

7 years

 

Finance leases

 

 

13 years

 

 

 

13 years

 

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

3.0%

 

 

 

2.7%

 

Finance leases

 

 

4.6%

 

 

 

5.2%

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ending June 30,

 

Operating Leases

 

 

Finance Leases

 

 

 

 

2020

 

$

1,678

 

 

$

591

 

2021

 

 

1,438

 

 

 

616

 

2022

 

 

1,235

 

 

 

626

 

2023

 

 

1,036

 

 

 

631

 

2024

 

 

839

 

 

 

641

 

Thereafter

 

 

2,438

 

 

 

5,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease payments

 

 

8,664

 

 

 

8,776

 

Less imputed interest

 

 

(961

)

 

 

(2,202

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

7,703

 

 

$

6,574

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Balance, beginning of year

 

 

7,677

 

 

 

7,708

 

 

 

7,808

 

Issued

 

 

116

 

 

 

68

 

 

 

70

 

Repurchased

 

 

(150

)

 

 

(99

)

 

 

(170

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of year

 

 

7,643

 

 

 

7,677

 

 

 

7,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

First Quarter

 

 

24

 

 

$

2,600

 

 

 

22

 

 

$

1,600

 

 

 

63

 

 

$

3,550

 

Second Quarter

 

 

57

 

 

 

6,100

 

 

 

22

 

 

 

1,800

 

 

 

59

 

 

 

3,533

 

Third Quarter

 

 

36

 

 

 

3,899

 

 

 

34

 

 

 

3,100

 

 

 

25

 

 

 

1,600

 

Fourth Quarter

 

 

33

 

 

 

4,200

 

 

 

21

 

 

 

2,100

 

 

 

23

 

 

 

1,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

150

 

 

$

16,799

 

 

 

99

 

 

$

  8,600

 

 

 

170

 

 

$

  10,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declaration Date

Record Date

 

 

Payment Date

 

Dividend

Per Share

 

 

Amount

 

 

 

 

 

Fiscal Year 2019

 

 

 

 

 

 

 

 

 (In millions)

 

 

 

 

 

 

September 18, 2018

 

 

November 15, 2018

 

 

 

December 13, 2018

 

 

$

0.46

 

 

$

3,544

 

November 28, 2018

 

 

February 21, 2019

 

 

 

March 14, 2019

 

 

 

0.46

 

 

 

3,526

 

March 11, 2019

 

 

May 16, 2019

 

 

 

June 13, 2019

 

 

 

0.46

 

 

 

3,521

 

June 12, 2019

 

 

August 15, 2019

 

 

 

September 12, 2019

 

 

 

0.46

 

 

 

3,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

$

1.84

 

 

$

14,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 19, 2017

 

 

November 16, 2017

 

 

 

December 14, 2017

 

 

$

0.42

 

 

$

3,238

 

November 29, 2017

 

 

February 15, 2018

 

 

 

March 8, 2018

 

 

 

0.42

 

 

 

3,232

 

March 12, 2018

 

 

May 17, 2018

 

 

 

June 14, 2018

 

 

 

0.42

 

 

 

3,226

 

June 13, 2018

 

 

August 16, 2018

 

 

 

September 13, 2018

 

 

 

0.42

 

 

 

3,220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

$

1.68

 

 

$

12,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

173

 

 

$

134

 

 

$

352

 

Unrealized gains, net of tax of $2, $11, and $4

 

 

160

 

 

 

218

 

 

 

328

 

Reclassification adjustments for gains included in revenue

 

 

(341

)

 

 

(185

)

 

 

(555

)

Tax expense included in provision for income taxes

 

 

8

 

 

 

6

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

(333

)

 

 

(179

)

 

 

(546

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to derivatives, net of tax of $(6), $5, and $(5)

 

 

(173

)

 

 

39

 

 

 

(218

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

0

 

 

$

173

 

 

$

134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(850

)

 

$

1,825

 

 

$

2,941

 

Unrealized gains (losses), net of tax of $616, $(427), and $267

 

 

2,331

 

 

 

(1,146

)

 

 

517

 

Reclassification adjustments for (gains) losses included in other income (expense), net

 

 

93

 

 

 

(2,309

)

 

 

(2,513

)

Tax expense (benefit) included in provision for income taxes

 

 

(19

)

 

 

738

 

 

 

880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

74

 

 

 

(1,571

)

 

 

(1,633

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change related to investments, net of tax of $635, $(1,165), and $(613)

 

 

2,405

 

 

 

(2,717

)

 

 

(1,116

)

Cumulative effect of accounting changes

 

 

(67

)

 

 

42

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

1,488

 

 

$

(850

)

 

$

1,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation Adjustments and Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

  (1,510

)

 

$

  (1,332

)

 

$

  (1,499

)

Translation adjustments and other, net of tax effects of $(1), $0, and $9

 

 

(318

)

 

 

(178

)

 

 

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

(1,828

)

 

$

(1,510

)

 

$

(1,332

)

  

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss), end of period

 

$

(340

)

 

$

(2,187

)

 

$

627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Stock-based compensation expense

 

$

4,652

 

 

$

  3,940

 

 

$

  3,266

 

Income tax benefits related to stock-based compensation

 

 

816

 

 

 

823

 

 

 

1,066

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Dividends per share (quarterly amounts)

 

 

  $0.42 - $0.46

 

 

 

  $0.39 - $0.42

 

 

 

  $0.36 - $0.39

 

Interest rates

 

 

1.8% - 3.1%

 

 

 

1.7% - 2.9%

 

 

 

1.2% - 2.2%

 

 

 

Shares

 

 

Weighted

Average

Grant-Date

Fair Value

 

 

 

 

 

(In millions)

 

 

 

 

 

Stock Awards

  

 

 

 

Nonvested balance, beginning of year

 

 

174

 

 

$

  57.85

 

Granted (a)

 

 

63

 

 

 

107.02

 

Vested

 

 

(77

) 

 

 

57.08

 

Forfeited

 

 

(13

) 

 

 

69.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested balance, end of year

 

 

147

 

 

$

78.49

 

 

 

 

 

 

 

 

 

 

(a)

Includes 2 million, 3 million, and 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2019, 2018, and 2017, respectively.

(Shares in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Shares purchased

 

 

11

 

 

 

13

 

 

 

13

 

Average price per share

 

$

104.85

 

 

$

  76.40

 

 

$

  56.36

 

 

 

 

•

Office Commercial, including Office 365 subscriptions and Office licensed on-premises, comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, and Skype for Business, and related Client Access Licenses (“CALs”).

 

•

Office Consumer, including Office 365 subscriptions and Office licensed on-premises, and Office Consumer Services, including Skype, Outlook.com, and OneDrive.

 

•

LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.

 

•

Dynamics business solutions, including Dynamics 365, a set of cloud-based applications across ERP and CRM, Dynamics ERP on-premises, and Dynamics CRM on-premises.

 

•

Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, GitHub, and Azure.

 

•

Enterprise Services, including Premier Support Services and Microsoft Consulting Services.

 

•

Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Internet of Things (“IoT”); and MSN advertising.

 

•

Devices, including Microsoft Surface, PC accessories, and other intelligent devices.

 

•

Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, cloud services, and advertising (“Xbox Live”), video games, and third-party video game royalties.

 

•

Search.

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

 

2019

 

 

 

2018

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

41,160

 

 

$

35,865

 

 

$

29,870

 

Intelligent Cloud

 

 

38,985

 

 

 

32,219

 

 

 

27,407

 

More Personal Computing

 

 

45,698

 

 

 

42,276

 

 

 

39,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

125,843

 

 

$

110,360

 

 

$

96,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Productivity and Business Processes

 

$

16,219

 

 

$

12,924

 

 

$

11,389

 

Intelligent Cloud

 

 

13,920

 

 

 

11,524

 

 

 

9,127

 

More Personal Computing

 

 

12,820

 

 

 

10,610

 

 

 

8,815

 

Corporate and Other

 

 

0

 

 

 

0

 

 

 

(306

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

42,959

 

 

$

35,058

 

 

$

29,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

United States (a)

 

$

64,199

 

 

$

55,926

 

 

$

51,078

 

Other countries

 

 

61,644

 

 

 

54,434

 

 

 

45,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

125,843

 

 

$

  110,360

 

 

$

  96,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

(In millions)

 

 

 

 

 

 

 

 

 

 

Year Ended June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

Server products and cloud services

 

$

32,622

 

 

$

26,129

 

 

$

21,649

 

Office products and cloud services

 

 

31,769

 

 

 

28,316

 

 

 

25,573

 

Windows

 

 

20,395

 

 

 

19,518

 

 

 

18,593

 

Gaming

 

 

11,386

 

 

 

10,353

 

 

 

9,051

 

Search advertising

 

 

7,628

 

 

 

7,012

 

 

 

6,219

 

LinkedIn

 

 

6,754

 

 

 

5,259

 

 

 

2,271

 

Enterprise Services

 

 

6,124

 

 

 

5,846

 

 

 

5,542

 

Devices

 

 

6,095

 

 

 

5,134

 

 

 

5,062

 

Other

 

 

3,070

 

 

 

2,793

 

 

 

2,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

125,843

 

 

$

110,360

 

 

$

  96,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

June 30,

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

United States

 

$

55,252

 

 

$

44,501

 

 

$

42,730

 

Ireland

 

 

12,958

 

 

 

12,843

 

 

 

12,889

 

Other countries

 

 

25,422

 

 

 

22,538

 

 

 

19,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

  93,632

 

 

$

  79,882

 

 

$

  75,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

September 30

 

 

December 31

 

 

March 31

 

 

June 30

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

  29,084

 

 

$

32,471

 

 

$

30,571

 

 

$

33,717

 

 

$

125,843

 

Gross margin

 

 

19,179

 

 

 

20,048

 

 

 

20,401

 

 

 

23,305

 

 

 

82,933

 

Operating income

 

 

9,955

 

 

 

10,258

 

 

 

10,341

 

 

 

12,405

 

 

 

42,959

 

Net income (a)

 

 

8,824

 

 

 

8,420

 

 

 

8,809

 

 

 

13,187

 

 

 

39,240

 

Basic earnings per share

 

 

1.15

 

 

 

1.09

 

 

 

1.15

 

 

 

1.72

 

 

 

5.11

 

Diluted earnings per share (b)

 

 

1.14

 

 

 

1.08

 

 

 

1.14

 

 

 

1.71

 

 

 

5.06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

  24,538

 

 

$

28,918

 

 

$

26,819

 

 

$

30,085

 

 

$

110,360

 

Gross margin

 

 

16,260

 

 

 

17,854

 

 

 

17,550

 

 

 

20,343

 

 

 

72,007

 

Operating income

 

 

7,708

 

 

 

8,679

 

 

 

8,292

 

 

 

10,379

 

 

 

35,058

 

Net income (loss) (c)

 

 

6,576

 

 

 

(6,302

) 

 

 

7,424

 

 

 

8,873

 

 

 

16,571

 

Basic earnings (loss) per share

 

 

0.85

 

 

 

(0.82

) 

 

 

0.96

 

 

 

1.15

 

 

 

2.15

 

Diluted earnings (loss) per share (d)

 

 

0.84

 

 

 

(0.82

)

 

 

0.95

 

 

 

1.14

 

 

 

2.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Reflects the $157 million net charge related to the enactment of the TCJA for the second quarter and the $2.6 billion net income tax benefit related to the intangible property transfers for the fourth quarter, which together increased net income by $2.4 billion for fiscal year 2019. See Note 12 – Income Taxes for further information.

(b)

Reflects the net charge related to the enactment of the TCJA and the net income tax benefit related to the intangible property transfers, which decreased (increased) diluted EPS $0.02 for the second quarter, $(0.34) for the fourth quarter, and $(0.31) for fiscal year 2019.

(c)

Reflects the net charge (benefit) related to the enactment of the TCJA of $13.8 billion for the second quarter, $(104) million for the fourth quarter, and $13.7 billion for fiscal year 2018.

(d)

Reflects the net charge (benefit) related to the enactment of the TCJA, which decreased (increased) diluted EPS $1.78 for the second quarter, $(0.01) for the fourth quarter, and $1.75 for fiscal year 2018.

 

•

Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.

 

•

Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

 

•

The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.

 

•

Estimation of variable consideration when determining the amount of revenue to recognize (e.g., customer credits, incentives, and in certain instances, estimation of customer usage of products and services).

 

•

We tested the effectiveness of internal controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration.

 

•

We evaluated management’s significant accounting policies related to these customer agreements for reasonableness.

 

•

We selected a sample of customer agreements and performed the following procedures:

 

•

Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.

 

•

Tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration.

 

•

Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.

 

•

We evaluated the reasonableness of management’s estimate of stand-alone selling prices for products and services that are not sold separately.

 

•

We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.

 

•

We evaluated the appropriateness and consistency of management’s methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.

 

•

We read and evaluated management’s documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions.

 

•

We tested the reasonableness of management’s judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.

 

•

For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions.

 

•

We evaluated the reasonableness of management’s estimates by considering how tax law, including statutes, regulations and case law, impacted management’s judgments.

(a)

Financial Statements and Schedules

Index to Financial Statements

 

Page

 

 

 

 

 

Income Statements

 

51

 

 

 

Comprehensive Income Statements

 

52

 

 

 

Balance Sheets

 

53

 

 

 

Cash Flows Statements

 

54

 

 

 

Stockholders’ Equity Statements

 

55

 

 

 

Notes to Financial Statements

 

56

 

 

 

Report of Independent Registered Public Accounting Firm

 

93

 

(b)

Exhibit Listing

 

 

 

 

 

Incorporated by Reference

 

Exhibit
Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

 

Period

Ending

 

 

Exhibit

 

 

Filing Date

 

 

 

 

 

 

 

 

 

3.1

 

Amended and Restated Articles of Incorporation of Microsoft Corporation

 

 

 

 

8-K

 

 

 

 

 

 

 

3.1

 

 

 

12/1/16

 

 

 

 

 

 

 

 

3.2

 

Bylaws of Microsoft Corporation

 

 

 

 

8-K

 

 

 

 

 

 

 

3.2

 

 

 

6/14/17

 

 

 

 

 

 

 

 

4.1

 

Form of Indenture between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee (“Base Indenture”)

 

 

 

 

S-3ASR

 

 

 

 

 

 

 

4.1

 

 

 

11/20/08

 

 

 

 

 

 

 

 

4.2

 

Form of First Supplemental Indenture for 2.95% Notes due 2014, 4.20% Notes due 2019, and 5.20% Notes due 2039, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Base Indenture

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

5/15/09

 

 

 

 

 

 

 

 

4.5

 

Form of Second Supplemental Indenture for 0.875% Notes due 2013, 1.625% Notes due 2015, 3.00% Notes due 2020, and 4.50% Notes due 2040, dated as of September 27, 2010, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

9/27/10

 

 

 

 

 

 

Incorporated by Reference

 

Exhibit
Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

 

Period

Ending

 

 

Exhibit

 

 

Filing Date

 

 

 

 

 

 

 

 

 

4.6

 

Third Supplemental Indenture for 2.500% Notes due 2016, 4.000% Notes due 2021, and 5.300% Notes due 2041, dated as of February 8, 2011, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

2/8/11

 

 

 

 

 

 

 

 

4.7

 

Fourth Supplemental Indenture for 0.875% Notes due 2017, 2.125% Notes due 2022, and 3.500% Notes due 2042, dated as of November 7, 2012, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

11/7/12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.8

 

Fifth Supplemental Indenture for 2.625% Notes due 2033, dated as of May 2, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

5/1/13

 

 

 

 

 

 

 

 

4.9

 

Sixth Supplemental Indenture for 1.000% Notes due 2018, 2.375% Notes due 2023, and 3.750% Notes due 2043, dated as of May 2, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

5/1/13

 

 

 

 

 

 

 

 

4.10

 

Seventh Supplemental Indenture for 2.125% Notes due 2021 and 3.125% Notes due 2028, dated as of December 6, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

12/6/13

 

 

 

 

 

 

Incorporated by Reference

 

Exhibit
Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

 

Period

Ending

 

 

Exhibit

 

 

Filing Date

 

 

 

 

 

 

 

 

 

4.11

 

Eighth Supplemental Indenture for 1.625% Notes due 2018, 3.625% Notes due 2023, and 4.875% Notes due 2043, dated as of December 6, 2013, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.2

 

 

 

12/6/13

 

 

 

 

 

 

 

 

4.12

 

Ninth Supplemental Indenture for 1.850% Notes due 2020, 2.375% Notes due 2022, 2.700% Notes due 2025, 3.500% Notes due 2035, 3.750% Notes due 2045, and 4.000% Notes due 2055, dated as of February 12, 2015, between Microsoft Corporation and U.S. Bank National Association, as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

2/12/15

 

 

 

 

 

 

 

 

 

4.13

 

Tenth Supplemental Indenture for 1.300% Notes due 2018, 2.000% Notes due 2020, 2.650% Notes due 2022, 3.125% Notes due 2025, 4.200% Notes due 2035, 4.450% Notes due 2045, and 4.750% Notes due 2055, dated as of November 3, 2015, between Microsoft Corporation and U.S. Bank National Association, as Trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

11/3/15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.14

 

Eleventh Supplemental Indenture for 1.100% Notes due 2019, 1.550% Notes due 2021, 2.000% Notes due 2023, 2.400% Notes due 2026, 3.450% Notes due 2036, 3.700% Notes due 2046, and 3.950% Notes due 2056, dated as of August 8, 2016, between Microsoft Corporation and U.S. Bank, National Association, as trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

8/5/16

 

 

 

 

 

 

Incorporated by Reference

 

Exhibit
Number

 

Exhibit Description

 

Filed

Herewith

 

Form

 

 

Period

Ending

 

 

Exhibit

 

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.15

 

Twelfth Supplemental Indenture for 1.850% Notes due 2020, 2.400% Notes due 2022, 2.875% Notes due 2024, 3.300% Notes due 2027, 4.100% Notes due 2037, 4.250% Notes due 2047, and 4.500% Notes due 2057, dated as of February 6, 2017, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee, to the Indenture, dated as of May 18, 2009, between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee

 

 

 

 

8-K

 

 

 

 

 

 

 

4.1

 

 

 

2/3/17

 

 

 

 

 

 

 

 

4.16

 

Description of Securities

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.1*

 

Microsoft Corporation 2001 Stock Plan

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.1

 

 

 

10/20/16

 

 

 

 

 

 

 

 

10.4*

 

Microsoft Corporation Employee Stock Purchase Plan

 

 

 

 

10-K

 

 

 

6/30/12

 

 

 

10.4

 

 

 

7/26/12

 

 

 

 

 

 

 

 

10.5*

 

Microsoft Corporation Deferred Compensation Plan

 

 

 

 

10-K

 

 

 

6/30/18

 

 

 

10.5

 

 

 

8/3/18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.6*

 

Microsoft Corporation 2017 Stock Plan

 

 

 

 

DEF14A

 

 

 

 

 

 

 

Annex C

 

 

 

10/16/17

 

 

 

 

 

 

 

 

10.7*

 

Form of Stock Award Agreement Under the Microsoft Corporation 2017 Stock Plan

 

 

 

 

10-Q

 

 

 

3/31/2018

 

 

 

10.26

 

 

 

4/26/18

 

 

 

 

 

 

 

 

10.8*

 

Form of Performance Stock Award Agreement Under the Microsoft Corporation 2017 Stock Plan

 

 

 

 

10-Q

 

 

 

3/31/2018

 

 

 

10.27

 

 

 

4/26/18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.12

 

Amended and Restated Officers’ Indemnification Trust Agreement between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.12

 

 

 

10/20/16

 

 

 

 

 

 

 

 

10.13

 

Form of Indemnification Agreement and Amended and Restated Directors’ Indemnification Trust Agreement between Microsoft Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.14*

 

Microsoft Corporation Deferred Compensation Plan for Non-Employee Directors

 

 

 

 

 

10-Q

 

 

 

 12/31/17

 

 

 

10.14

 

 

 

1/31/18

 

 

 

 

 

 

 

 

10.15*

 

Microsoft Corporation Executive Incentive Plan

 

 

 

 

8-K

 

 

 

 

 

 

 

10.1

 

 

 

9/19/18

 

 

 

 

 

 

 

 

10.19*

 

Microsoft Corporation Executive Incentive Plan

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.17

 

 

 

10/20/16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.20*

 

Form of Executive Incentive Plan (Executive Officer SAs) Stock Award Agreement under the Microsoft Corporation 2001 Stock Plan

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.18

 

 

 

10/20/16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.21*

 

Form of Executive Incentive Plan Performance Stock Award Agreement under the Microsoft Corporation 2001 Stock Plan

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.25

 

 

 

10/20/16

 

 

 

 

 

 

 

 

 

10.22*

 

Senior Executive Severance Benefit Plan 

 

 

 

 

10-Q

 

 

 

9/30/16

 

 

 

10.22

 

 

 

10/20/16

 

 

 

 

 

 

 

 

10.23*

 

Offer Letter, dated February 3, 2014, between Microsoft Corporation and Satya Nadella

 

 

 

 

8-K

 

 

 

 

 

 

 

10.1

 

 

 

2/4/14

 

 

 

 

 

 

 

 

10.24*

 

Long-Term Performance Stock Award Agreement between Microsoft Corporation and Satya Nadella

 

 

 

 

10-Q

 

 

 

12/31/14

 

 

 

10.24

 

 

 

1/26/15

 

 

 

 

 

 

 

 

21

 

Subsidiaries of Registrant

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23.1

 

Consent of Independent Registered Public Accounting Firm

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1**

 

Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.2**

 

Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

Indicates a management contract or compensatory plan or arrangement.

**

Furnished, not filed.

MICROSOFT CORPORATION

 

/S/    FRANK H. BROD

Frank H. Brod

Corporate Vice President, Finance and Administration;

Chief Accounting Officer (Principal Accounting Officer)

 

Signature

 

Title

 

 

 

/s/    JOHN W. THOMPSON        

 

John W. Thompson

 

Chairman

 

 

/s/    SATYA NADELLA        

 

Satya Nadella

 

Director and Chief Executive Officer

 

 

/s/    WILLIAM H. GATES III         

 

William H. Gates III

 

Director

 

 

/s/    REID HOFFMAN         

 

Reid Hoffman

 

Director

 

 

/s/    HUGH F. JOHNSTON        

 

Hugh F. Johnston

 

Director

 

 

/s/    TERI L. LIST-STOLL                

 

Teri L. List-Stoll

 

Director

 

 

/s/    CHARLES H. NOSKI                

 

Charles H. Noski

 

Director

 

 

/s/    HELMUT PANKE                

 

Helmut Panke

 

Director

 

 

/s/    SANDRA E. PETERSON

 

Sandra E. Peterson

 

Director

 

 

 

/s/    PENNY S. PRITZKER        

 

Penny S. Pritzker

 

Director

 

 

/s/    CHARLES W. SCHARF        

 

Charles W. Scharf

 

Director

 

 

/s/    ARNE M. SORENSON        

 

Arne M. Sorenson

 

Director

 

 

 

 

/s/    JOHN W. STANTON        

 

John W. Stanton

 

Director

 

 

/s/    PADMASREE WARRIOR

 

Padmasree Warrior

 

Director

 

 

/s/    AMY E. HOOD        

 

Amy E. Hood

 

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

/s/    FRANK H. BROD        

 

Frank H. Brod

 

Corporate Vice President, Finance and Administration;

Chief Accounting Officer

(Principal Accounting Officer)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Delaware
 
91-1646860
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
 
Nasdaq Global Select Market
Large accelerated filer
 
x
Accelerated filer
 
¨
Non-accelerated filer
 
¨  
Smaller reporting company
 
¨
 
 
 
Emerging growth company
 
¨
Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2018
$
693,894,417,636

Number of shares of common stock outstanding as of January 23, 2019
491,202,890

 
 
 
Page
PART I
 
Item 1.
Business
3
Item 1A.
Risk Factors
6
Item 1B.
Unresolved Staff Comments
14
Item 2.
Properties
15
Item 3.
Legal Proceedings
15
Item 4.
Mine Safety Disclosures
15
 
 
 
PART II
 
Item 5.
Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities
16
Item 6.
Selected Consolidated Financial Data
17
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
31
Item 8.
Financial Statements and Supplementary Data
34
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
70
Item 9A.
Controls and Procedures
70
Item 9B.
Other Information
72
 
 
PART III
 
Item 10.
Directors, Executive Officers, and Corporate Governance
72
Item 11.
Executive Compensation
72
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
72
Item 13.
Certain Relationships and Related Transactions, and Director Independence
72
Item 14.
Principal Accountant Fees and Services
72
 
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
73
Item 16.
Form 10-K Summary
73
Signatures
75
Item 1.
Business
Name
 
Age
 
Position
Jeffrey P. Bezos
 
55
 
President, Chief Executive Officer, and Chairman of the Board
Jeffrey M. Blackburn
 
49
 
Senior Vice President, Business Development
Andrew R. Jassy
 
51
 
CEO Amazon Web Services
Brian T. Olsavsky
 
55
 
Senior Vice President and Chief Financial Officer
Shelley L. Reynolds
 
54
 
Vice President, Worldwide Controller, and Principal Accounting Officer
Jeffrey A. Wilke
 
52
 
CEO Worldwide Consumer
David A. Zapolsky
 
55
 
Senior Vice President, General Counsel, and Secretary
Name
 
Age
 
Position
Jeffrey P. Bezos
 
55
 
President, Chief Executive Officer, and Chairman of the Board
Tom A. Alberg
 
78
 
Managing Director, Madrona Venture Group
Jamie S. Gorelick
 
68
 
Partner, Wilmer Cutler Pickering Hale and Dorr LLP
Daniel P. Huttenlocher
 
60
 
Dean and Vice Provost, Cornell Tech at Cornell University
Judith A. McGrath
 
66
 
Senior Advisor, Astronauts Wanted * No experience necessary
Jonathan J. Rubinstein
 
62
 
Former co-CEO, Bridgewater Associates, LP
Thomas O. Ryder
 
74
 
Retired, Former Chairman, Reader’s Digest Association, Inc.
Patricia Q. Stonesifer
 
62
 
President and Chief Executive Officer, Martha’s Table
Wendell P. Weeks
 
59
 
Chief Executive Officer, Corning Incorporated
Item 1A.
Risk Factors
•
our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ demands;
•
our ability to retain and expand our network of sellers;
•
our ability to offer products on favorable terms, manage inventory, and fulfill orders;
•
the introduction of competitive stores, websites, products, services, price decreases, or improvements;
•
changes in usage or adoption rates of the Internet, e-commerce, electronic devices, and web services, including outside the U.S.;
•
timing, effectiveness, and costs of expansion and upgrades of our systems and infrastructure;
•
the success of our geographic, service, and product line expansions;
•
the extent to which we finance, and the terms of any such financing for, our current operations and future growth;
•
the outcomes of legal proceedings and claims, which may include significant monetary damages or injunctive relief and could have a material adverse impact on our operating results;
•
variations in the mix of products and services we sell;
•
variations in our level of merchandise and vendor returns;
•
the extent to which we offer free shipping, continue to reduce prices worldwide, and provide additional benefits to our customers;
•
factors affecting our reputation or brand image;
•
the extent to which we invest in technology and content, fulfillment, and other expense categories;
•
increases in the prices of fuel and gasoline, as well as increases in the prices of other energy products and commodities like paper and packing supplies;
•
the extent to which our equity-method investees record significant operating and non-operating items;
•
the extent to which operators of the networks between our customers and our stores successfully charge fees to grant our customers unimpaired and unconstrained access to our online services;
•
our ability to collect amounts owed to us when they become due;
•
the extent to which use of our services is affected by spyware, viruses, phishing and other spam emails, denial of service attacks, data theft, computer intrusions, outages, and similar events; and
•
terrorist attacks and armed hostilities.
•
local economic and political conditions;
•
government regulation (such as regulation of our product and service offerings and of competition); restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs); nationalization; and restrictions on foreign ownership;
•
restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services, and content, including uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal precedent, and varying rules, regulations, and practices regarding the physical and digital distribution of media products and enforcement of intellectual property rights;
•
business licensing or certification requirements, such as for imports, exports, web services, and electronic devices;
•
limitations on the repatriation and investment of funds and foreign currency exchange restrictions;
•
limited fulfillment and technology infrastructure;
•
shorter payable and longer receivable cycles and the resultant negative impact on cash flow;
•
laws and regulations regarding consumer and data protection, privacy, network security, encryption, payments, and restrictions on pricing or discounts;
•
lower levels of use of the Internet;
•
lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;
•
lower levels of credit card usage and increased payment risk;
•
difficulty in staffing, developing, and managing foreign operations as a result of distance, language, and cultural differences;
•
different employee/employer relationships and the existence of works councils and labor unions;
•
compliance with the U.S. Foreign Corrupt Practices Act and other applicable U.S. and foreign laws prohibiting corrupt payments to government officials and other third parties;
•
laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans, and taxes; and
•
geopolitical events, including war and terrorism.
•
disruption of our ongoing business, including loss of management focus on existing businesses;
•
impairment of other relationships;
•
variability in revenue and income from entering into, amending, or terminating such agreements or relationships; and
•
difficulty integrating under the commercial agreements.
•
disruption of our ongoing business, including loss of management focus on existing businesses;
•
problems retaining key personnel;
•
additional operating losses and expenses of the businesses we acquired or in which we invested;
•
the potential impairment of tangible and intangible assets and goodwill, including as a result of acquisitions;
•
the potential impairment of customer and other relationships of the company we acquired or in which we invested or our own customers as a result of any integration of operations;
•
the difficulty of completing such transactions and achieving anticipated benefits within expected timeframes, or at all;
•
the difficulty of incorporating acquired operations, technology, and rights into our offerings, and unanticipated expenses related to such integration;
•
the difficulty of integrating a new company’s accounting, financial reporting, management, information and information security, human resource, and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;
•
for investments in which an investee’s financial performance is incorporated into our financial results, either in full or in part, the dependence on the investee’s accounting, financial reporting, and similar systems, controls, and processes;
•
the difficulty of implementing at companies we acquire the controls, procedures, and policies appropriate for a larger public company;
•
the risks associated with businesses we acquire or invest in, which may differ from or be more significant than the risks our other businesses face;
•
potential unknown liabilities associated with a company we acquire or in which we invest; and
•
for foreign transactions, additional risks related to the integration of operations across different cultures and languages, and the economic, political, and regulatory risks associated with specific countries.
•
changes in interest rates;
•
conditions or trends in the Internet and the industry segments we operate in;
•
quarterly variations in operating results;
•
fluctuations in the stock market in general and market prices for Internet-related companies in particular;
•
changes in financial estimates by us or securities analysts and recommendations by securities analysts;
•
changes in our capital structure, including issuance of additional debt or equity to the public;
•
changes in the valuation methodology of, or performance by, other e-commerce or technology companies; and
•
transactions in our common stock by major investors and certain analyst reports, news, and speculation.
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Description of Use
 
Leased Square
Footage (1)
 
Owned Square Footage
 
Location
Office space
 
16,642

 
3,901

 
North America
Office space
 
14,738

 
—

 
International
Physical stores (2)
 
19,176

 
724

 
North America
Physical stores (2)
 
173

 
—

 
International
Fulfillment, data centers, and other
 
153,917

 
4,467

 
North America
Fulfillment, data centers, and other
 
72,596

 
2,085

 
International
Total
 
277,242

 
11,177

 
 
(1)
For leased properties, represents the total leased space excluding sub-leased space.
(2)
This includes 520 North America and 7 International stores as of December 31, 2018.
Segment
 
Leased Square
Footage (1)
 
Owned Square Footage (1)
North America
 
165,503

 
1,977

International
 
70,619

 
895

AWS
 
9,740

 
4,404

Total
 
245,862

 
7,276

(1)
Segment amounts exclude corporate facilities. Shared facilities are allocated among the segments based on usage and primarily relate to facilities that hold our technology infrastructure. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 10 — Segment Information.”
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 5.
Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities
Item 6.
Selected Consolidated Financial Data
 
 
Year Ended December 31,
 
 
2014
 
2015
 
2016
 
2017 (1)
 
2018
 
 
(in millions, except per share data)
Statements of Operations:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
88,988

 
$
107,006

 
$
135,987

 
$
177,866

 
$
232,887

Operating income
 
$
178

 
$
2,233

 
$
4,186

 
$
4,106

 
$
12,421

Net income (loss)
 
$
(241
)
 
$
596

 
$
2,371

 
$
3,033

 
$
10,073

Basic earnings per share (2)
 
$
(0.52
)
 
$
1.28

 
$
5.01

 
$
6.32

 
$
20.68

Diluted earnings per share (2)
 
$
(0.52
)
 
$
1.25

 
$
4.90

 
$
6.15

 
$
20.14

Weighted-average shares used in computation of earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
462

 
467

 
474

 
480

 
487

Diluted
 
462

 
477

 
484

 
493

 
500

Statements of Cash Flows:
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities (3)
 
$
6,976

 
$
11,909

 
$
17,203

 
$
18,365

 
$
30,723

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
2014
 
2015
 
2016
 
2017
 
2018
 
 
(in millions)
Balance Sheets:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
53,618

 
$
64,747

 
$
83,402

 
$
131,310

 
$
162,648

Total long-term obligations
 
$
14,794

 
$
17,477

 
$
20,301

 
$
45,718

 
$
50,708

(1)
We acquired Whole Foods Market on August 28, 2017. The results of Whole Foods Market have been included in our results of operation from the date of acquisition.
(2)
For further discussion of earnings per share, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business and Accounting Policies.”
(3)
As a result of the adoption of new accounting guidance, we retrospectively adjusted our consolidated statements of cash flows to add restricted cash to cash and cash equivalents, which restated cash provided by operating activities by $128 million, $(130) million, $(69) million, and $(69) million in 2014, 2015, 2016, and 2017. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business and Accounting Policies” for additional information.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(1)
See “Results of Operations — Non-GAAP Financial Measures” below for additional information on our non-GAAP free cash flows financial measures.
(2)
Working capital consists of accounts receivable, inventory, and accounts payable.
(3)
The operating cycle is the number of days of sales in inventory plus the number of days of sales in accounts receivable minus accounts payable days.
  
Year Ended December 31,
 
2016
 
2017
 
2018
Cash provided by (used in):
 
 
 
 
 
Operating activities
$
17,203

 
$
18,365

 
$
30,723

Investing activities
(9,516
)
 
(27,084
)
 
(12,369
)
Financing activities
(3,716
)
 
9,928

 
(7,686
)
  
Year Ended December 31,
 
2016
 
2017
 
2018
Net Sales:
 
 
 
 
 
North America
$
79,785

 
$
106,110

 
$
141,366

International
43,983

 
54,297

 
65,866

AWS
12,219

 
17,459

 
25,655

Consolidated
$
135,987

 
$
177,866

 
$
232,887

Year-over-year Percentage Growth:
 
 
 
 
 
North America
25
%
 
33
%
 
33
%
International
24

 
23

 
21

AWS
55

 
43

 
47

Consolidated
27

 
31

 
31

Year-over-year Percentage Growth, excluding the effect of foreign exchange rates:
 
 
 
 
 
North America
25
%
 
33
%
 
33
%
International
26

 
23

 
19

AWS
55

 
43

 
47

Consolidated
28

 
31

 
30

Net sales mix:
 
 
 
 
 
North America
59
%
 
60
%
 
61
%
International
32

 
30

 
28

AWS
9

 
10

 
11

Consolidated
100
%
 
100
%
 
100
%
 
Year Ended December 31,
 
2016
 
2017
 
2018
Operating Income (Loss):
 
 
 
 
 
North America
$
2,361

 
$
2,837

 
$
7,267

International
(1,283
)
 
(3,062
)
 
(2,142
)
AWS
3,108

 
4,331

 
7,296

Consolidated
$
4,186


$
4,106


$
12,421

 
Year Ended December 31,
  
2016
 
2017
 
2018
Operating expenses:
 
 
 
 
 
Cost of sales
$
88,265

 
$
111,934

 
$
139,156

Fulfillment
17,619

 
25,249

 
34,027

Marketing
7,233

 
10,069

 
13,814

Technology and content
16,085

 
22,620

 
28,837

General and administrative
2,432

 
3,674

 
4,336

Other operating expense, net
167

 
214

 
296

Total operating expenses
$
131,801


$
173,760


$
220,466

Year-over-year Percentage Growth:
 
 
 
 
 
Cost of sales
23
 %
 
27
%
 
24
%
Fulfillment
31

 
43

 
35

Marketing
38

 
39

 
37

Technology and content
28

 
41

 
27

General and administrative
39

 
51

 
18

Other operating expense, net
(2
)
 
28

 
38

Percent of Net Sales:
 
 
 
 
 
Cost of sales
64.9
 %
 
62.9
%
 
59.8
%
Fulfillment
13.0

 
14.2

 
14.6

Marketing
5.3

 
5.7

 
5.9

Technology and content
11.8

 
12.7

 
12.4

General and administrative
1.8

 
2.1

 
1.9

Other operating expense, net
0.1

 
0.1

 
0.1

 
Year Ended December 31,
 
2016
 
2017
 
2018
Net cash provided by (used in) operating activities
$
17,203

 
$
18,365

 
$
30,723

Purchases of property and equipment, net of proceeds from property and equipment incentives
(6,737
)
 
(10,058
)
 
(11,323
)
Free cash flow
$
10,466


$
8,307


$
19,400

 
 
 
 
 
 
Net cash provided by (used in) investing activities
$
(9,516
)
 
$
(27,084
)
 
$
(12,369
)
Net cash provided by (used in) financing activities
$
(3,716
)
 
$
9,928

 
$
(7,686
)
 
Year Ended December 31,
 
2016
 
2017
 
2018
Net cash provided by (used in) operating activities
$
17,203

 
$
18,365

 
$
30,723

Purchases of property and equipment, net of proceeds from property and equipment incentives
(6,737
)
 
(10,058
)
 
(11,323
)
Principal repayments of capital lease obligations
(3,860
)
 
(4,799
)
 
(7,449
)
Principal repayments of finance lease obligations
(147
)
 
(200
)
 
(337
)
Free cash flow less lease principal repayments
$
6,459

 
$
3,308

 
$
11,614

 
 
 
 
 
 
Net cash provided by (used in) investing activities
$
(9,516
)
 
$
(27,084
)
 
$
(12,369
)
Net cash provided by (used in) financing activities
$
(3,716
)
 
$
9,928

 
$
(7,686
)
 
Year Ended December 31,
 
2016
 
2017
 
2018
Net cash provided by (used in) operating activities
$
17,203

 
$
18,365

 
$
30,723

Purchases of property and equipment, net of proceeds from property and equipment incentives
(6,737
)
 
(10,058
)
 
(11,323
)
Property and equipment acquired under capital leases
(5,704
)
 
(9,637
)
 
(10,615
)
Principal repayments of finance lease obligations
(147
)
 
(200
)
 
(337
)
Free cash flow less finance lease principal repayments and assets acquired under capital leases
$
4,615

 
$
(1,530
)
 
$
8,448

 
 
 
 
 
 
Net cash provided by (used in) investing activities
$
(9,516
)
 
$
(27,084
)
 
$
(12,369
)
Net cash provided by (used in) financing activities
$
(3,716
)
 
$
9,928

 
$
(7,686
)
 
Year Ended December 31, 2016
 
Year Ended December 31, 2017
 
Year Ended December 31, 2018
  
As
Reported
 
Exchange
Rate
Effect (1)
 
At Prior
Year
Rates (2)
 
As
Reported
 
Exchange
Rate
Effect (1)
 
At Prior
Year
Rates (2)
 
As
Reported
 
Exchange
Rate
Effect (1)
 
At Prior
Year
Rates (2)
Net sales
$
135,987

 
$
550

 
$
136,537

 
$
177,866

 
$
(210
)
 
$
177,656

 
$
232,887

 
$
(1,253
)
 
$
231,634

Operating expenses
131,801

 
660

 
132,461

 
173,760

 
(352
)
 
173,408

 
220,466

 
(1,027
)
 
219,439

Operating income
4,186

 
(110
)
 
4,076

 
4,106

 
142

 
4,248

 
12,421

 
(226
)
 
12,195

(1)
Represents the change in reported amounts resulting from changes in foreign exchange rates from those in effect in the comparable prior year for operating results.
(2)
Represents the outcome that would have resulted had foreign exchange rates in the reported period been the same as those in effect in the comparable prior year for operating results.
•
Net sales are expected to be between $56 billion and $60 billion, or to grow between 10% and 18% compared with first quarter 2018. This guidance anticipates an unfavorable impact of approximately 210 basis points from foreign exchange rates.
•
Operating income is expected to be between $2.3 billion and $3.3 billion, compared with $1.9 billion in first quarter 2018.
•
This guidance assumes, among other things, that no additional business acquisitions, investments, restructurings, or legal settlements are concluded.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
 
Estimated Fair Value as of December 31, 2018
Money market funds
 
$
12,515

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
12,515

 
$
12,515

Weighted average interest rate
 
1.16
%
 
 —%

 
 —%

 
—
%
 
—
%
 
—
%
 
1.16
%
 
 
Corporate debt securities
 
3,220

 
1,086

 
560

 
120

 
16

 
—

 
5,002

 
4,990

Weighted average interest rate
 
2.96
%
 
3.25
%
 
3.36
%
 
3.86
%
 
4.26
%
 
—
%
 
3.09
%
 
 
U.S. government and agency securities
 
11,071

 
416

 
135

 
91

 
4

 
—

 
11,717

 
11,667

Weighted average interest rate
 
2.35
%
 
2.49
%
 
2.68
%
 
2.76
%
 
3.38
%
 
—
%
 
2.36
%
 
 
Asset-backed securities
 
305

 
255

 
162

 
121

 
52

 
—

 
895

 
892

Weighted average interest rate
 
2.96
%
 
3.07
%
 
3.02
%
 
2.99
%
 
3.07
%
 
—
%
 
3.01
%
 
 
Foreign government and agency securities
 
761

 
50

 
4

 
—

 
—

 
—

 
815

 
815

Weighted average interest rate
 
2.60
%
 
2.68
%
 
3.32
%
 
—
%
 
—
%
 
—
%
 
2.61
%
 
 
Other fixed income securities
 
89

 
67

 
32

 
—

 
—

 
—

 
188

 
188

Weighted average interest rate
 
3.25
%
 
2.89
%
 
3.13
%
 
—
%
 
—
%
 
—
%
 
3.10
%
 
 
 
 
$
27,961

 
$
1,874

 
$
893

 
$
332

 
$
72

 
$
—

 
$
31,132

 
 
Cash equivalents and marketable fixed income securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
31,067

2.600% Notes due on December 5, 2019
$
1,000

1.900% Notes due on August 21, 2020
$
1,000

3.300% Notes due on December 5, 2021
$
1,000

2.500% Notes due on November 29, 2022
$
1,250

2.400% Notes due on February 22, 2023
$
1,000

2.800% Notes due on August 22, 2024
$
2,000

3.800% Notes due on December 5, 2024
$
1,250

5.200% Notes due on December 3, 2025
$
1,000

3.150% Notes due on August 22, 2027
$
3,500

4.800% Notes due on December 5, 2034
$
1,250

3.875% Notes due on August 22, 2037
$
2,750

4.950% Notes due on December 5, 2044
$
1,500

4.050% Notes due on August 22, 2047
$
3,500

4.250% Notes due on August 22, 2057
$
2,250

Item 8.
Financial Statements and Supplementary Data
 
Page
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
35
Consolidated Statements of Cash Flows
36
Consolidated Statements of Operations
37
Consolidated Statements of Comprehensive Income
38
Consolidated Balance Sheets
39
Consolidated Statements of Stockholders’ Equity
40
Notes to Consolidated Financial Statements
41
  
Year Ended December 31,
 
2016
 
2017
 
2018
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
$
16,175

 
$
19,934

 
$
21,856

OPERATING ACTIVITIES:
 
 
 
 
 
Net income
2,371

 
3,033

 
10,073

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
 
Depreciation of property and equipment and other amortization, including capitalized content costs
8,116

 
11,478

 
15,341

Stock-based compensation
2,975

 
4,215

 
5,418

Other operating expense, net
160

 
202

 
274

Other expense (income), net
(20
)
 
(292
)
 
219

Deferred income taxes
(246
)
 
(29
)
 
441

Changes in operating assets and liabilities:
 
 
 
 
 
Inventories
(1,426
)
 
(3,583
)
 
(1,314
)
Accounts receivable, net and other
(3,436
)
 
(4,780
)
 
(4,615
)
Accounts payable
5,030

 
7,100

 
3,263

Accrued expenses and other
1,724

 
283

 
472

Unearned revenue
1,955

 
738

 
1,151

Net cash provided by (used in) operating activities
17,203


18,365


30,723

INVESTING ACTIVITIES:
 
 
 
 
 
Purchases of property and equipment
(7,804
)
 
(11,955
)
 
(13,427
)
Proceeds from property and equipment incentives
1,067

 
1,897

 
2,104

Acquisitions, net of cash acquired, and other
(116
)
 
(13,972
)
 
(2,186
)
Sales and maturities of marketable securities
4,577

 
9,677

 
8,240

Purchases of marketable securities
(7,240
)
 
(12,731
)
 
(7,100
)
Net cash provided by (used in) investing activities
(9,516
)
 
(27,084
)

(12,369
)
FINANCING ACTIVITIES:
 
 
 
 
 
Proceeds from long-term debt and other
618

 
16,228

 
768

Repayments of long-term debt and other
(327
)
 
(1,301
)
 
(668
)
Principal repayments of capital lease obligations
(3,860
)
 
(4,799
)
 
(7,449
)
Principal repayments of finance lease obligations
(147
)
 
(200
)
 
(337
)
Net cash provided by (used in) financing activities
(3,716
)

9,928


(7,686
)
Foreign currency effect on cash, cash equivalents, and restricted cash
(212
)
 
713

 
(351
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
3,759


1,922


10,317

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
$
19,934


$
21,856


$
32,173

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
 
Cash paid for interest on long-term debt
$
290

 
$
328

 
$
854

Cash paid for interest on capital and finance lease obligations
206

 
319

 
575

Cash paid for income taxes, net of refunds
412

 
957

 
1,184

Property and equipment acquired under capital leases
5,704

 
9,637

 
10,615

Property and equipment acquired under build-to-suit leases
1,209

 
3,541

 
3,641

  
Year Ended December 31,
 
2016
 
2017
 
2018
Net product sales
$
94,665

 
$
118,573

 
$
141,915

Net service sales
41,322

 
59,293

 
90,972

Total net sales
135,987

 
177,866

 
232,887

Operating expenses:
 
 
 
 
 
Cost of sales
88,265

 
111,934

 
139,156

Fulfillment
17,619

 
25,249

 
34,027

Marketing
7,233

 
10,069

 
13,814

Technology and content
16,085

 
22,620

 
28,837

General and administrative
2,432

 
3,674

 
4,336

Other operating expense, net
167

 
214

 
296

Total operating expenses
131,801

 
173,760

 
220,466

Operating income
4,186

 
4,106

 
12,421

Interest income
100

 
202

 
440

Interest expense
(484
)
 
(848
)
 
(1,417
)
Other income (expense), net
90

 
346

 
(183
)
Total non-operating income (expense)
(294
)
 
(300
)
 
(1,160
)
Income before income taxes
3,892

 
3,806

 
11,261

Provision for income taxes
(1,425
)
 
(769
)
 
(1,197
)
Equity-method investment activity, net of tax
(96
)
 
(4
)
 
9

Net income
$
2,371

 
$
3,033

 
$
10,073

Basic earnings per share
$
5.01

 
$
6.32

 
$
20.68

Diluted earnings per share
$
4.90

 
$
6.15

 
$
20.14

Weighted-average shares used in computation of earnings per share:
 
 
 
 
 
Basic
474

 
480

 
487

Diluted
484

 
493

 
500

  
Year Ended December 31,
 
2016
 
2017
 
2018
Net income
$
2,371

 
$
3,033

 
$
10,073

Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $(49), $5, and $6
(279
)
 
533

 
(538
)
Net change in unrealized gains (losses) on available-for-sale debt securities:
 
 
 
 
 
Unrealized gains (losses), net of tax of $(12), $5, and $0
9

 
(39
)
 
(17
)
Reclassification adjustment for losses (gains) included in “Other income (expense), net,” net of tax of $0, $0, and $0
8

 
7

 
8

Net unrealized gains (losses) on available-for-sale debt securities
17

 
(32
)
 
(9
)
Total other comprehensive income (loss)
(262
)
 
501

 
(547
)
Comprehensive income
$
2,109

 
$
3,534

 
$
9,526

 
December 31,
 
2017
 
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
20,522

 
$
31,750

Marketable securities
10,464

 
9,500

Inventories
16,047

 
17,174

Accounts receivable, net and other
13,164

 
16,677

Total current assets
60,197

 
75,101

Property and equipment, net
48,866

 
61,797

Goodwill
13,350

 
14,548

Other assets
8,897

 
11,202

Total assets
$
131,310

 
$
162,648

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
34,616

 
$
38,192

Accrued expenses and other
18,170

 
23,663

Unearned revenue
5,097

 
6,536

Total current liabilities
57,883

 
68,391

Long-term debt
24,743

 
23,495

Other long-term liabilities
20,975

 
27,213

Commitments and contingencies (Note 7)


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value:
 
 
 
Authorized shares — 500
 
 
 
Issued and outstanding shares — none
—

 
—

Common stock, $0.01 par value:
 
 
 
Authorized shares — 5,000
 
 
 
Issued shares — 507 and 514
 
 
 
Outstanding shares — 484 and 491
5

 
5

Treasury stock, at cost
(1,837
)
 
(1,837
)
Additional paid-in capital
21,389

 
26,791

Accumulated other comprehensive loss
(484
)
 
(1,035
)
Retained earnings
8,636

 
19,625

Total stockholders’ equity
27,709

 
43,549

Total liabilities and stockholders’ equity
$
131,310

 
$
162,648

 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Treasury
Stock
 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained
Earnings
 
Total
Stockholders’
Equity
Balance as of January 1, 2016
471

 
$
5

 
$
(1,837
)
 
$
13,394

 
$
(723
)
 
$
2,545

 
$
13,384

Net income
—

 
—

 
—

 
—

 
—

 
2,371

 
2,371

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(262
)
 
—

 
(262
)
Exercise of common stock options
6

 
—

 
—

 
1

 
—

 
—

 
1

Excess tax benefits from stock-based compensation
—

 
—

 
—

 
829

 
—

 
—

 
829

Stock-based compensation and issuance of employee benefit plan stock
—

 
—

 
—

 
2,962

 
—

 
—

 
2,962

Balance as of December 31, 2016
477

 
5

 
(1,837
)
 
17,186


(985
)

4,916


19,285

Cumulative effect of a change in accounting principle related to stock-based compensation
—

 
—

 
—

 
—

 
—

 
687

 
687

Net income
—

 
—

 
—

 
—

 
—

 
3,033

 
3,033

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
501

 
—

 
501

Exercise of common stock options
7

 
—

 
—

 
1

 
—

 
—

 
1

Stock-based compensation and issuance of employee benefit plan stock
—

 
—

 
—

 
4,202

 
—

 
—

 
4,202

Balance as of December 31, 2017
484

 
5

 
(1,837
)
 
21,389

 
(484
)
 
8,636

 
27,709

Cumulative effect of changes in accounting principles related to revenue recognition, income taxes, and financial instruments
—

 
—

 
—

 
—

 
(4
)
 
916

 
912

Net income
—

 
—

 
—

 
—

 
—

 
10,073

 
10,073

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(547
)
 
—

 
(547
)
Exercise of common stock options
7

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based compensation and issuance of employee benefit plan stock
—

 
—

 
—

 
5,402

 
—

 
—

 
5,402

Balance as of December 31, 2018
491

 
$
5

 
$
(1,837
)
 
$
26,791

 
$
(1,035
)
 
$
19,625

 
$
43,549

  
Year Ended December 31,
 
2016
 
2017
 
2018
Shares used in computation of basic earnings per share
474

 
480

 
487

Total dilutive effect of outstanding stock awards
10

 
13

 
13

Shares used in computation of diluted earnings per share
484

 
493

 
500

Year Ended December 31, 2016
Previously Reported
 
Adjustments
 
As Revised
Operating activities
$
17,272

 
$
(69
)
 
$
17,203

Investing activities
(9,876
)
 
360

 
(9,516
)
Financing activities
(3,740
)
 
24

 
(3,716
)
Net change in cash, cash equivalents, and restricted cash
$
3,656


$
315


$
3,971

Year Ended December 31, 2017
Previously Reported
 
Adjustments
 
As Revised
Operating activities
$
18,434

 
$
(69
)
 
$
18,365

Investing activities
(27,819
)
 
735

 
(27,084
)
Financing activities
9,860

 
68

 
9,928

Net change in cash, cash equivalents, and restricted cash
$
475

 
$
734

 
$
1,209

 
December 31, 2017
  
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Total
Estimated
Fair Value
Cash
$
9,982

 
$
—

 
$
—

 
$
9,982

Level 1 securities:
 
 
 
 
 
 
 
Money market funds
11,343

 
—

 
—

 
11,343

Equity securities
23

 
30

 
—

 
53

Level 2 securities:
 
 
 
 
 
 
 
Foreign government and agency securities
620

 
—

 
—

 
620

U.S. government and agency securities
4,841

 
1

 
(19
)
 
4,823

Corporate debt securities
4,265

 
1

 
(9
)
 
4,257

Asset-backed securities
910

 
—

 
(5
)
 
905

Other fixed income securities
340

 
—

 
(2
)
 
338

 
$
32,324


$
32


$
(35
)

$
32,321

Less: Restricted cash, cash equivalents, and marketable securities (1)
 
 
 
 
 
 
(1,335
)
Total cash, cash equivalents, and marketable securities
 
$
30,986

 
December 31, 2018
  
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Total
Estimated
Fair Value
Cash
$
10,406

 
$
—

 
$
—

 
$
10,406

Level 1 securities:
 
 
 
 
 
 
 
Money market funds
12,515

 
—

 
—

 
12,515

Equity securities
29

 
143

 
(2
)
 
170

Level 2 securities:
 
 
 
 
 
 
 
Foreign government and agency securities
815

 
—

 
—

 
815

U.S. government and agency securities
11,686

 
1

 
(20
)
 
11,667

Corporate debt securities
5,008

 
1

 
(19
)
 
4,990

Asset-backed securities
896

 
—

 
(4
)
 
892

Other fixed income securities
190

 
—

 
(2
)
 
188

Equity securities
28

 
5

 
—

 
33

 
$
41,573

 
$
150

 
$
(47
)
 
$
41,676

Less: Restricted cash, cash equivalents, and marketable securities (1)
 
 
 
 
 
 
(426
)
Total cash, cash equivalents, and marketable securities
 
 
 
 
 
 
$
41,250

(1)
We are required to pledge or otherwise restrict a portion of our cash, cash equivalents, and marketable securities as collateral for real estate leases, amounts due to third-party sellers in certain jurisdictions, debt, and standby and trade letters of credit. We classify cash, cash equivalents, and marketable securities with use restrictions of less than twelve months as “Accounts receivable, net and other” and of twelve months or longer as non-current “Other assets” on our consolidated balance sheets. See “Note 7 — Commitments and Contingencies.”
 
Year Ended December 31,
 
2016
 
2017
 
2018
Realized gains
$
3

 
$
5

 
$
2

Realized losses
11

 
11

 
9

 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
27,520

 
$
27,508

Due after one year through five years
2,865

 
2,845

Due after five years through ten years
187

 
185

Due after ten years
538

 
529

Total
$
31,110

 
$
31,067

 
December 31, 2017
 
December 31, 2018
Cash and cash equivalents
$
20,522

 
$
31,750

Restricted cash included in accounts receivable, net and other
1,329

 
418

Restricted cash included in other assets
5

 
5

Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
$
21,856

 
$
32,173

 
December 31,
 
2017
 
2018
Gross property and equipment (1):
 
 
 
Land and buildings
$
23,896

 
$
31,741

Equipment
42,244

 
54,591

Other assets
2,438

 
2,577

Construction in progress
4,078

 
6,861

Gross property and equipment
72,656

 
95,770

Total accumulated depreciation and amortization (1)
23,790

 
33,973

Total property and equipment, net
$
48,866

 
$
61,797

(1)
We revised our prior year presentation of gross property and equipment and total accumulated depreciation and amortization to include all property and equipment in service, including equipment which is fully-depreciated, to conform to the current year presentation. Total property and equipment, net remains unchanged for the prior year.
 
December 31,
 
2016
 
2017
 
2018
 
 
 
 
 
 
Purchase Price
 
 
 
 
 
Cash paid, net of cash acquired
$
81

 
$
13,859

 
$
1,618

Indemnification holdback
22

 
104

 
31

 
$
103

 
$
13,963

 
$
1,649

Allocation
 
 
 
 
 
Goodwill
$
60

 
$
9,501

 
$
1,228

Intangible assets (1):
 
 
 
 
 
Marketing-related
2

 
1,987

 
186

Contract-based
1

 
440

 
13

Technology-based
53

 
166

 
285

Customer-related
1

 
54

 
193

 
57

 
2,647

 
677

Property and equipment
3

 
3,810

 
11

Deferred tax assets
17

 
117

 
174

Other assets acquired
10

 
1,858

 
282

Long-term debt
(5
)
 
(1,165
)
 
(176
)
Deferred tax liabilities
(18
)
 
(961
)
 
(159
)
Other liabilities assumed
(21
)
 
(1,844
)
 
(388
)
 
$
103

 
$
13,963

 
$
1,649

(1)
Intangible assets acquired in 2016, 2017, and 2018 have estimated useful lives of between one and seven years, one and twenty-five years, and two and seven years, with weighted-average amortization periods of five years, twenty-one years, and six years.
 
North
America
 
International
 
AWS
 
Consolidated
Goodwill - January 1, 2017
$
2,044

 
$
694

 
$
1,046

 
$
3,784

New acquisitions (1)
9,115

 
368

 
18

 
9,501

Other adjustments (2)
6

 
46

 
13

 
65

Goodwill - December 31, 2017
11,165

 
1,108

 
1,077

 
13,350

New acquisitions (1)
1,031

 
177

 
20

 
1,228

Other adjustments (2)
(5
)
 
(15
)
 
(10
)
 
(30
)
Goodwill - December 31, 2018
$
12,191

 
$
1,270

 
$
1,087

 
$
14,548

(1)
Primarily includes the acquisition of Whole Foods Market in the North America segment and Souq in the International segment in 2017 and the acquisitions of Ring and PillPack in the North America segment in 2018.
(2)
Primarily includes changes in foreign exchange rates.
 
December 31,
 
 
 
2017
 
2018
 
 
  
Acquired
Intangibles,
Gross (1)
 
Accumulated
Amortization (1)
 
Acquired
Intangibles,
Net
 
Acquired
Intangibles,
Gross (1)
 
Accumulated
Amortization (1)
 
Acquired
Intangibles,
Net
 
Weighted
Average Life
Remaining
Marketing-related
$
2,486

 
$
(418
)
 
$
2,068

 
$
2,542

 
$
(431
)
 
$
2,111

 
21.2
Contract-based
1,013

 
(213
)
 
800

 
1,430

 
(224
)
 
1,206

 
12.3
Technology- and content-based
640

 
(252
)
 
388

 
941

 
(377
)
 
564

 
4.6
Customer-related
283

 
(168
)
 
115

 
437

 
(208
)
 
229

 
4.4
Acquired intangibles (2)
$
4,422

 
$
(1,051
)
 
$
3,371

 
$
5,350

 
$
(1,240
)
 
$
4,110

 
15.4
(1)
Excludes the original cost and accumulated amortization of fully-amortized intangibles.
(2)
Intangible assets have estimated useful lives of between one and twenty-five years.
Year Ended December 31,
2019
$
511

2020
412

2021
355

2022
323

2023
270

Thereafter
2,217

 
$
4,088

 
December 31,
 
2017
 
2018
2.600% Notes due on December 5, 2019 (2)
1,000

 
1,000

1.900% Notes due on August 21, 2020 (3)
1,000

 
1,000

3.300% Notes due on December 5, 2021 (2)
1,000

 
1,000

2.500% Notes due on November 29, 2022 (1)
1,250

 
1,250

2.400% Notes due on February 22, 2023 (3)
1,000

 
1,000

2.800% Notes due on August 22, 2024 (3)
2,000

 
2,000

3.800% Notes due on December 5, 2024 (2)
1,250

 
1,250

5.200% Notes due on December 3, 2025 (4)
1,000

 
1,000

3.150% Notes due on August 22, 2027 (3)
3,500

 
3,500

4.800% Notes due on December 5, 2034 (2)
1,250

 
1,250

3.875% Notes due on August 22, 2037 (3)
2,750

 
2,750

4.950% Notes due on December 5, 2044 (2)
1,500

 
1,500

4.050% Notes due on August 22, 2047 (3)
3,500

 
3,500

4.250% Notes due on August 22, 2057 (3)
2,250

 
2,250

Credit Facility
592

 
594

Other long-term debt
100

 
121

Total debt
24,942

 
24,965

Less current portion of long-term debt
(100
)
 
(1,371
)
Face value of long-term debt
$
24,842

 
$
23,594

(1)
Issued in November 2012, effective interest rate of the 2022 Notes was 2.66%.
(2)
Issued in December 2014, effective interest rates of the 2019, 2021, 2024, 2034, and 2044 Notes were 2.73%, 3.43%, 3.90%, 4.92%, and 5.11%.
(3)
Issued in August 2017, effective interest rates of the 2020, 2023, 2024, 2027, 2037, 2047, and 2057 Notes were 2.16%, 2.56%, 2.95%, 3.25%, 3.94%, 4.13%, and 4.33%.
(4)
Consists of $872 million of 2025 Notes issued in December 2017 in exchange for notes assumed in connection with the acquisition of Whole Foods Market and $128 million of 2025 Notes issued by Whole Foods Market that did not participate in our December 2017 exchange offer. The effective interest rate of the 2025 Notes was 3.02%.
Year Ended December 31,
2019
$
1,371

2020
1,298

2021
1,016

2022
1,266

2023
1,014

Thereafter
19,000

 
$
24,965

 
December 31,
 
2017
 
2018
Long-term capital lease obligations
$
8,438

 
$
9,650

Long-term finance lease obligations
4,745

 
6,642

Construction liabilities
1,350

 
2,516

Tax contingencies
1,004

 
896

Long-term deferred tax liabilities
990

 
1,490

Other
4,448

 
6,019

Total other long-term liabilities
$
20,975

 
$
27,213

 
December 31, 2018
Gross capital lease obligations
$
17,952

Less imputed interest
(582
)
Present value of net minimum lease payments
17,370

Less current portion of capital lease obligations
(7,720
)
Total long-term capital lease obligations
$
9,650

 
December 31, 2018
Gross finance lease obligations
$
8,376

Less imputed interest
(1,323
)
Present value of net minimum lease payments
7,053

Less current portion of finance lease obligations
(411
)
Total long-term finance lease obligations
$
6,642

 
Year Ended December 31,
 
 
 
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Debt principal and interest
$
2,277

 
$
2,161

 
$
1,861

 
$
2,078

 
$
1,781

 
$
30,013

 
$
40,171

Capital lease obligations, including interest (1)
7,807

 
5,742

 
2,725

 
704

 
473

 
501

 
17,952

Finance lease obligations, including interest (2)
628

 
640

 
652

 
664

 
675

 
5,117

 
8,376

Operating leases
3,127

 
3,070

 
2,775

 
2,473

 
2,195

 
13,026

 
26,666

Unconditional purchase obligations (3)
3,523

 
4,103

 
3,291

 
3,098

 
2,974

 
5,204

 
22,193

Other commitments (4) (5)
2,618

 
1,455

 
1,056

 
843

 
808

 
8,875

 
15,655

Total commitments
$
19,980

 
$
17,171

 
$
12,360

 
$
9,860

 
$
8,906

 
$
62,736

 
$
131,013

(1)
Excluding interest, current capital lease obligations of $5.8 billion and $7.7 billion are recorded within “Accrued expenses and other” as of December 31, 2017 and 2018, and $8.4 billion and $9.6 billion are recorded within “Other long-term liabilities” as of December 31, 2017 and 2018.
(2)
Excluding interest, current finance lease obligations of $282 million and $411 million are recorded within “Accrued expenses and other” as of December 31, 2017 and 2018, and $4.7 billion and $6.6 billion are recorded within “Other long-term liabilities” as of December 31, 2017 and 2018.
(3)
Includes unconditional purchase obligations related to certain products offered in our Whole Foods Market stores and long-term agreements to acquire and license digital media content that are not reflected on the consolidated balance sheets. For those digital media content agreements with variable terms, we do not estimate the total obligation beyond any minimum quantities and/or pricing as of the reporting date. Purchase obligations associated with renewal provisions solely at the option of the content provider are included to the extent such commitments are fixed or a minimum amount is specified.
(4)
Includes the estimated timing and amounts of payments for rent and tenant improvements associated with build-to-suit lease arrangements and equipment lease arrangements that have not been placed in service and digital media content liabilities associated with long-term digital media content assets with initial terms greater than one year.
(5)
Excludes approximately $3.4 billion of accrued tax contingencies for which we cannot make a reasonably reliable estimate of the amount and period of payment, if any.
 
Year Ended December 31,
 
2016
 
2017
 
2018
Cost of sales
$
16

 
$
47

 
$
73

Fulfillment
657

 
911

 
1,121

Marketing
323

 
511

 
769

Technology and content
1,664

 
2,305

 
2,888

General and administrative
315

 
441

 
567

Total stock-based compensation expense (1)
$
2,975

 
$
4,215

 
$
5,418

(1)
The related tax benefits were $907 million, $860 million, and $1.1 billion for 2016, 2017, and 2018. In 2017 and 2018, the tax benefit reflects the permanent reduction in the U.S. statutory corporate tax rate from 35% to 21%.
 
Number of Units
 
Weighted Average
Grant-Date
Fair Value
Outstanding as of January 1, 2016
18.9

 
$
362

Units granted
9.3

 
660

Units vested
(6.1
)
 
321

Units forfeited
(2.3
)
 
440

Outstanding as of December 31, 2016
19.8

 
506

Units granted
8.9

 
946

Units vested
(6.8
)
 
400

Units forfeited
(1.8
)
 
649

Outstanding as of December 31, 2017
20.1

 
725

Units granted
5.0

 
1,522

Units vested
(7.1
)
 
578

Units forfeited
(2.1
)
 
862

Outstanding as of December 31, 2018
15.9

 
$
1,024

 
Year Ended  
 
 
 
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Scheduled vesting — restricted stock units
6.9

 
5.6

 
2.4

 
0.8

 
0.1

 
0.1

 
15.9

 
Year Ended December 31,
 
2016
 
2017
 
2018
Current taxes:
 
 
 
 
 
U.S. Federal
$
1,136

 
$
(137
)
 
$
(129
)
U.S. State
208

 
211

 
322

International
327

 
724

 
563

Current taxes
1,671

 
798

 
756

Deferred taxes:
 
 
 
 
 
U.S. Federal
116

 
(202
)
 
565

U.S. State
(31
)
 
(26
)
 
5

International
(331
)
 
199

 
(129
)
Deferred taxes
(246
)
 
(29
)
 
441

Provision for income taxes, net
$
1,425

 
$
769

 
$
1,197

 
Year Ended December 31,
 
2016
 
2017
 
2018
U.S.
$
4,551

 
$
5,630

 
$
11,157

International
(659
)
 
(1,824
)
 
104

Income before income taxes
$
3,892

 
$
3,806

 
$
11,261

 
Year Ended December 31,
 
2016
 
2017
 
2018
Income taxes computed at the federal statutory rate (1)
$
1,362

 
$
1,332

 
$
2,365

Effect of:
 
 
 
 
 
Tax impact of foreign earnings
(69
)
 
1,178

 
119

State taxes, net of federal benefits
110

 
114

 
263

Tax credits
(119
)
 
(220
)
 
(419
)
Stock-based compensation (2)
189

 
(917
)
 
(1,086
)
Domestic production activities deduction
(94
)
 
—

 
—

2017 Impact of U.S. Tax Act
—

 
(789
)
 
(157
)
Other, net
46

 
71

 
112

Total
$
1,425

 
$
769

 
$
1,197

(1)
The U.S. Tax Act reduced the U.S. federal statutory rate from 35% to 21% beginning in 2018.
(2)
Includes non-deductible stock-based compensation and beginning in 2017, excess tax benefits from stock-based compensation. For 2017 and 2018, our tax provision includes $1.3 billion and $1.6 billion of excess tax benefits from stock-based compensation.
 
December 31,
 
2017
 
2018
Deferred tax assets (1):
 
 
 
Loss carryforwards U.S. - Federal/States
$
211

 
$
222

Loss carryforwards - Foreign
2,149

 
2,551

Accrued liabilities, reserves, and other expenses
901

 
1,064

Stock-based compensation
1,026

 
1,293

Deferred revenue
349

 
321

Assets held for investment
35

 
69

Depreciation and amortization
279

 
2,386

Other items
167

 
94

Tax credits
381

 
734

Total gross deferred tax assets
5,498

 
8,734

Less valuation allowance (2)
(2,538
)
 
(4,950
)
Deferred tax assets, net of valuation allowance
2,960

 
3,784

Deferred tax liabilities:
 
 
 
Depreciation and amortization
(2,568
)
 
(3,579
)
Acquisition related intangible assets
(531
)
 
(682
)
Other items
(58
)
 
(67
)
Net deferred tax assets (liabilities), net of valuation allowance
$
(197
)
 
$
(544
)
(1)
Deferred tax assets are presented net of tax contingencies.
(2)
Relates primarily to deferred tax assets that would only be realizable upon the generation of net income in certain foreign taxing jurisdictions and future capital gains.
 
December 31,
 
2016
 
2017
 
2018
Gross tax contingencies – January 1
$
1,181

 
$
1,710

 
$
2,309

Gross increases to tax positions in prior periods
355

 
223

 
164

Gross decreases to tax positions in prior periods
(133
)
 
(139
)
 
(90
)
Gross increases to current period tax positions
308

 
518

 
1,088

Settlements with tax authorities
—

 
—

 
(36
)
Lapse of statute of limitations
(1
)
 
(3
)
 
(21
)
Gross tax contingencies – December 31 (1)
$
1,710

 
$
2,309

 
$
3,414

(1)
As of December 31, 2018, we had approximately $3.4 billion of accrued tax contingencies, of which $1.7 billion, if fully recognized, would decrease our effective tax rate.
  
Year Ended December 31,
 
2016
 
2017
 
2018
North America
 
 
 
 
 
Net sales
$
79,785

 
$
106,110

 
$
141,366

Operating expenses
77,424

 
103,273

 
134,099

Operating income
$
2,361

 
$
2,837

 
$
7,267

International
 
 
 
 
 
Net sales
$
43,983

 
$
54,297

 
$
65,866

Operating expenses
45,266

 
57,359

 
68,008

Operating income (loss)
$
(1,283
)
 
$
(3,062
)
 
$
(2,142
)
AWS
 
 
 
 
 
Net sales
$
12,219

 
$
17,459

 
$
25,655

Operating expenses
9,111

 
13,128

 
18,359

Operating income
$
3,108

 
$
4,331

 
$
7,296

Consolidated
 
 
 
 
 
Net sales
$
135,987

 
$
177,866

 
$
232,887

Operating expenses
131,801

 
173,760

 
220,466

Operating income
4,186

 
4,106

 
12,421

Total non-operating income (expense)
(294
)
 
(300
)
 
(1,160
)
Provision for income taxes
(1,425
)
 
(769
)
 
(1,197
)
Equity-method investment activity, net of tax
(96
)
 
(4
)
 
9

Net income
$
2,371

 
$
3,033

 
$
10,073

  
Year Ended December 31,
 
2016
 
2017
 
2018
Net Sales:
 
 
 
 
 
Online stores (1)
$
91,431

 
$
108,354

 
$
122,987

Physical stores (2)
—

 
5,798

 
17,224

Third-party seller services (3)
22,993

 
31,881

 
42,745

Subscription services (4)
6,394

 
9,721

 
14,168

AWS
12,219

 
17,459

 
25,655

Other (5)
2,950

 
4,653

 
10,108

Consolidated
$
135,987

 
$
177,866

 
$
232,887

(1)
Includes product sales and digital media content where we record revenue gross. We leverage our retail infrastructure to offer a wide selection of consumable and durable goods that includes media products available in both a physical and digital format, such as books, music, videos, games, and software. These product sales include digital products sold on a transactional basis. Digital product subscriptions that provide unlimited viewing or usage rights are included in Subscription services.
(2)
Includes product sales where our customers physically select items in a store.
(3)
Includes commissions and any related fulfillment and shipping fees, and other third-party seller services.
(4)
Includes annual and monthly fees associated with Amazon Prime memberships, as well as audiobook, digital video, e-book, digital music, and other non-AWS subscription services.
(5)
Primarily includes sales of advertising services, as well as sales related to our other service offerings.
 
Year Ended December 31,
 
2016
 
2017
 
2018
United States
$
90,349

 
$
120,486

 
$
160,146

Germany
14,148

 
16,951

 
19,881

United Kingdom
9,547

 
11,372

 
14,524

Japan
10,797

 
11,907

 
13,829

Rest of world
11,146

 
17,150

 
24,507

Consolidated
$
135,987

 
$
177,866

 
$
232,887

 
December 31,
 
2016
 
2017
 
2018
North America (1)
$
22,225

 
$
35,844

 
$
47,251

International (1)
10,429

 
18,014

 
19,923

AWS (2)
12,698

 
18,660

 
26,340

Corporate
38,050

 
58,792

 
69,134

Consolidated
$
83,402

 
$
131,310

 
$
162,648

(1)
North America and International segment assets primarily consist of property and equipment, inventory, and accounts receivable.
(2)
AWS segment assets primarily consist of property and equipment and accounts receivable.
 
December 31,
 
2016
 
2017
 
2018
North America
$
10,143

 
$
20,401

 
$
27,052

International
3,448

 
7,425

 
8,552

AWS
10,300

 
14,885

 
18,851

Corporate
5,223

 
6,155

 
7,342

Consolidated
$
29,114

 
$
48,866

 
$
61,797

 
Year Ended December 31,
 
2016
 
2017
 
2018
North America (1)
$
5,132

 
$
13,200

 
$
10,749

International (1)
1,680

 
5,196

 
2,476

AWS (2)
5,193

 
9,190

 
9,783

Corporate
1,580

 
2,197

 
2,060

Consolidated
$
13,585

 
$
29,783

 
$
25,068

(1)
Includes property and equipment added under capital leases of $1.5 billion, $2.9 billion, and $2.0 billion in 2016, 2017, and 2018, and under other financing arrangements of $849 million, $2.9 billion, and $3.0 billion in 2016, 2017, and 2018.
(2)
Includes property and equipment added under capital leases of $4.0 billion, $7.3 billion, and $8.4 billion in 2016, 2017, and 2018, and under finance leases of $75 million, $134 million, and $245 million in 2016, 2017, and 2018.
 
Year Ended December 31,
 
2016
 
2017
 
2018
North America
$
1,971

 
$
3,029

 
$
4,415

International
930

 
1,278

 
1,628

AWS
3,461

 
4,524

 
6,095

Consolidated
$
6,362

 
$
8,831

 
$
12,138

 
 
Year Ended December 31, 2017 (1)
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter (2)
 
Fourth
Quarter (2)
Net sales
 
$
35,714

 
$
37,955

 
$
43,744

 
$
60,453

Operating income
 
1,005

 
628

 
347

 
2,127

Income before income taxes
 
953

 
666

 
316

 
1,872

Provision for income taxes
 
(229
)
 
(467
)
 
(58
)
 
(16
)
Net income
 
724

 
197

 
256

 
1,856

Basic earnings per share
 
1.52

 
0.41

 
0.53

 
3.85

Diluted earnings per share
 
1.48

 
0.40

 
0.52

 
3.75

Shares used in computation of earnings per share:
 
 
 
 
 
 
 
 
Basic
 
477

 
479

 
481

 
483

Diluted
 
490

 
492

 
494

 
496

 
 
Year Ended December 31, 2018 (1)
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Net sales
 
$
51,042

 
$
52,886

 
$
56,576

 
$
72,383

Operating income
 
1,927

 
2,983

 
3,724

 
3,786

Income before income taxes
 
1,916

 
2,605

 
3,390

 
3,350

Provision for income taxes
 
(287
)
 
(74
)
 
(508
)
 
(327
)
Net income
 
1,629

 
2,534

 
2,883

 
3,027

Basic earnings per share
 
3.36

 
5.21

 
5.91

 
6.18

Diluted earnings per share
 
3.27

 
5.07

 
5.75

 
6.04

Shares used in computation of earnings per share:
 
 
 
 
 
 
 
 
Basic
 
484

 
486

 
488

 
490

Diluted
 
498

 
500

 
501

 
501

(1)
The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year-to-date periods. This is due to the effects of rounding and changes in the number of weighted-average shares outstanding for each period.
(2)
We acquired Whole Foods Market on August 28, 2017. The results of Whole Foods Market have been included in our results of operation from the date of acquisition. See Item 8 of Part II, “Financial Statements and Supplementary Data — Note 4 — Acquisitions, Goodwill, and Acquired Intangible Assets” for additional information regarding this transaction.
Item 9.
Changes in and Disagreements with Accountants On Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers, and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Exhibit Number
 
Description
 
 
 
3.1
 
Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2000).
 
 
 
3.2
 
Amended and Restated Bylaws of the Company (incorporated by reference to the Company’s Current Report on Form 8-K, filed February 25, 2016).
 
 
 
4.1
 
Indenture, dated as of November 29, 2012, between Amazon.com, Inc. and Wells Fargo Bank, National Association, as trustee, and Form of 0.650% Note due 2015, Form of 1.200% Note due 2017, and Form of 2.500% Note due 2022 (incorporated by reference to the Company’s Current Report on Form 8-K, filed November 29, 2012).
 
 
 
4.2
 
Officers’ Certificate of Amazon.com, Inc., dated as of December 5, 2014, containing Form of 2.600% Note due 2019, Form of 3.300% Note due 2021, Form of 3.800% Note due 2024, Form of 4.800% Note due 2034, and Form of 4.950% Note due 2044 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 5, 2014).
 
 
 
4.3
 
Officers’ Certificate of Amazon.com, Inc., dated as of August 22, 2017, containing Form of 1.900% Note due 2020, Form of 2.400% Note due 2023, Form of 2.800% Note due 2024, Form of 3.150% Note due 2027, Form of 3.875% Note due 2037, Form of 4.050% Note due 2047, and Form of 4.250% Note due 2057 (incorporated by reference to the Company’s Current Report on Form 8-K, filed August 22, 2017).
 
 
 
4.4
 
Registration Rights Agreement, dated as of August 22, 2017, among Amazon.com, Inc. and the representatives of the initial purchasers of Amazon.com, Inc.’s 1.900% Notes due 2020, 2.400% Notes due 2023, 2.800% Notes due 2024, 3.150% Notes due 2027, 3.875% Notes due 2037, 4.050% Notes due 2047, and 4.250% Notes due 2057 (incorporated by reference to the Company’s Current Report on Form 8-K, filed August 22, 2017).
 
 
 
4.5
 
Officers’ Certificate of Amazon.com, Inc., dated as of December 20, 2017, containing Form of 5.200% Note due 2025 (incorporated by reference to the Company’s Current Report on Form 8-K, filed December 20, 2017).
 
 
 
10.1†
 
1997 Stock Incentive Plan (amended and restated) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2013).
 
 
 
10.2†
 
1999 Nonofficer Employee Stock Option Plan (amended and restated) (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2013).
 
 
 
10.3†
 
Form of Indemnification Agreement between the Company and each of its Directors (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (Registration No. 333-23795) filed March 24, 1997, as amended on April 21, 1997).
 
 
 
10.4†
 
Form of Restricted Stock Unit Agreement for Officers and Employees (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002).
 
 
 
10.5†
 
Form of Restricted Stock Unit Agreement for Directors (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002).
 
 
 
10.6†
 
Form of Restricted Stock Agreement (incorporated by reference to the Company’s Annual Report on Form 10-K for the Year ended December 31, 2001).
 
 
 
10.7†
 
Form of Global Restricted Stock Unit Award Agreement for Executive Officers.
 
 
 
10.8
 
Credit Agreement, dated as of May 20, 2016, among Amazon.com, Inc., Bank of America, N.A., as administrative agent, and the other lenders party thereto (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2016).
 
 
 
10.9+
 
Independent Contractor Agreement, dated as of March 15, 2017, between Amazon Corporate LLC and William B. Gordon (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2017).
 
 
 
21.1
 
List of Significant Subsidiaries.
 
 
 
23.1
 
Consent of Independent Registered Public Accounting Firm.
 
 
 
31.1
 
Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
 
31.2
 
Certification of Brian T. Olsavsky, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
 
 
 
32.1
 
Certification of Jeffrey P. Bezos, Chairman and Chief Executive Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.
 
 
 
32.2
 
Certification of Brian T. Olsavsky, Senior Vice President and Chief Financial Officer of Amazon.com, Inc., pursuant to 18 U.S.C. Section 1350.
 
 
 
101
 
The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, formatted in XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, (v) Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
 
 
 
 
 
As permitted by Item 601(b)(4)(iii)(A) of Regulation S-K, the Company has not filed with this Annual Report on Form 10-K certain instruments defining the rights of holders of long-term debt of the Company and its subsidiaries because the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish a copy of such agreements to the Commission upon request.
*
Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and the Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule and/or exhibit upon request.
+
Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
Item 16.
Form 10-K Summary
 
AMAZON.COM, INC.
 
 
 
 
By:
/s/ Jeffrey P. Bezos
 
 
Jeffrey P. Bezos
 
 
President, Chief Executive Officer,
and Chairman of the Board
Signature
 
Title
 
 
 
/s/ Jeffrey P. Bezos
 
 
Jeffrey P. Bezos
 
Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)
 
 
 
/s/ Brian T. Olsavsky
 
 
Brian T. Olsavsky
 
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
 
 
 
/s/ Shelley L. Reynolds
 
 
Shelley L. Reynolds
 
Vice President, Worldwide Controller (Principal Accounting Officer)
 
 
 
/s/ Tom A. Alberg
 
 
Tom A. Alberg
 
Director
 
 
 
/s/ Jamie S. Gorelick
 
 
Jamie S. Gorelick
 
Director
 
 
 
/s/ Daniel P. Huttenlocher
 
 
Daniel P. Huttenlocher
 
Director
 
 
 
/s/ Judith A. McGrath
 
 
Judith A. McGrath
 
Director
 
 
 
/s/ Jonathan J. Rubinstein
 
 
Jonathan J. Rubinstein
 
Director
 
 
 
/s/ Thomas O. Ryder
 
 
Thomas O. Ryder
 
Director
 
 
 
/s/ Patricia Q. Stonesifer
 
 
Patricia Q. Stonesifer
 
Director
 
 
 
/s/ Wendell P. Weeks
 
 
Wendell P. Weeks
 
Director